Permanent Life Insurance vs. Term: Which One’s the Better Deal?

January 8, 2014

term-vs-permanent-thumb-articleSome experts recommend people to buy term life insurance saying it is a rather inexpensive solution compared to permanent life insurance. While the savings from purchasing term life insurance can be invested and yield better returns over the short term, this strategy may not be as sound as it is being propagated. As people have different financial situations, and plans; it is very important to understand the key differences between the two types of life insurance in order to distinguish the benefits and pitfalls of picking one over another.

Term Life Insurance
People buying term life insurance pay a low premium in exchange of coverage over a specified period of time. If someone buying a term insurance dies during that short time-span when the coverage is given, the benefits from the life insurance policy will go to the specified beneficiary, for example, to a family member. However, if the life insurance policy expires at the end of the term period, and the person is still alive then his specified beneficiary does not receive any benefits. In reality, this can be a better deal for anyone who is either looking forward to saving cost in terms of premiums or when life insurance needs are only temporary.

Any family under financial stress may choose to take on a term or temporary life insurance, and may upgrade to a permanent life insurance when the family’s financial situation improves. Again, insurance needs can arise due to requirements. For example, a bank may require an individual to have life insurance before issuing a loan that has to cover the payback period. Under these circumstances, term life insurance is a viable and less expensive solution.

Permanent Life Insurance
The key distinction between term and permanent life insurance is that, with the latter, it is owned for life. The individual pays a higher premium where part of the payments can be diverted into a cash value savings account.

Permanent life insurance can be used as a wonderful financial tool to save on taxes as life insurance benefits are usually considered income tax free when the beneficiary is an irrevocable trust. It can also receive a waiver from estate tax, as well. Also, with term life insurance the low premiums increase over time when the person grows older. After a certain age, permanent life insurance can be a better option for people looking for coverage for life.

Both types of life insurance can make financial sense, depending on the situation and the goal of the individual. Just because term insurance costs less, initially at an early age, advocating it could be myopic.



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