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The task of navigating through different insurance policies to choose the best one for you can be a daunting task. As one grows into adulthood and starts a family, life insurance becomes a major part of their long-term financial planning.
However, not knowing the differences between various life insurance policies means you may be unable to choose the best one for you and your family’s needs. In this short guide, we will outline the differences between the two main forms of life insurance, namely: term and permanent life insurance to help you decide which is right for you.
Term vs. Permanent Life Insurance
Life insurance policies can be divided into two main types – term and permanent. While each kind contains different variants, the first step to choosing the right policy is to understand this major difference between term and permanent.
As the names suggest, term insurance is a policy that provides coverage for a limited or set amount of time. This could be 5, 10, 20, or even 30 years. On the other hand, permanent life insurance provides coverage for the rest of your life. Permanent life insurance is also called Whole or Universal life insurance.
There are three main differences that come along with this distinction. Since term and permanent insurance are in fact two vastly different categories of insurance, they also tend to differ in terms of price, value, and convertibility.
The payments made every month for your life insurance policy, known as premiums, are generally different between these two kinds of insurance. Term insurance premiums are usually lower than those paid for a permanent policy.
One important thing to keep in mind is that premiums for term insurance typically increase after each renewal. Conversely, premiums for permanent life insurance remain the same throughout your life.
2. Cash Value
Most permanent insurance policies have a savings component to them that is usually known as cash value. The more time your policy stands, the longer you pay premiums, and the larger the cash value for your permanent insurance becomes.
On the other hand, term insurance policies do not have a savings component to them and hence there is no cash value accumulated over time.
One thing about term life policies is that they are easily convertible to permanent insurance policies. However, permanent policies are generally non-convertible.
Which Insurance Policy is Right for Me?
When choosing an insurance policy that is right for you make sure to consider the three points provided above. Moreover, you will also have to consider your family’s financial needs, as well as assessing any weak points in your financial status that could lead to major problems for your family in the event of your premature death.
Many people get life insurance to cover their mortgage, or to pay for such things as funeral costs and college tuition. Choosing the insurance policy that is right for you will mean assessing which of your family’s financial needs is most likely to become a problem in the future.