Term & Cash Value

Choosing the right type of life insurance is a very personal decision. As always, the challenge lies in finding a policy that meets your insurance needs at a price you can afford. When you choose a life insurance policy, various factors enter into the equation, including:

  • your current life situation (dependents, mortgage, etc.),
  • the amount of coverage you need,
  • the amount of money you want to spend (premiums), and
  • the length of time you need the coverage to last.

Is there a simple answer? Sometimes.
Before you decide what type of insurance to buy, you should first determine how much insurance coverage you need. In some cases, the choice may be made for you. Your insurance need may be so large that the only way you can afford to meet it is by purchasing lower-premium term insurance. Alternatively, you might discover that your need is small enough not to warrant paying the higher premiums associated with cash value insurance. Or you may fall somewhere in the middle, where you can afford to purchase either term or cash value insurance, and the premiums for each seem reasonable in relation to the amount of coverage you need. In this case, you should take some time to compare term and cash value life insurance, in order to determine which type best suits your needs.

Term insurance
Term insurance is often referred to as "pure insurance." Term policies provide life insurance coverage for a specified period of time. You can typically buy term insurance for periods ranging from 1 to 30 years. If you die during the policy period, your beneficiary receives the policy death benefit. If you don't die during the term, your beneficiary receives nothing. At the end of the specified policy term, your coverage simply ends. You may be able to renew your term policy or covert it to a cash value policy without a physical exam according to the stipulations of the policy. Once you reach a certain age (usually 65 or 70), you may find it difficult to get term insurance coverage for more than one year--and the premiums will most likely be expensive. You may also find it difficult to get term insurance coverage if you develop a medical condition. Furthermore, there are also several variations of term life insurance, including "level" term and "decreasing" term.

Cash value insurance
Cash value insurance (often called "permanent insurance") combines death benefits with a savings component (the cash value). As long as you continue paying your premiums, cash value life insurance continues throughout your life, regardless of your age or your health. As you pay your premiums, a portion of each payment is set aside to create the cash value. During the early years of the policy, the cash value contribution is a large portion of each premium payment. As you get older, the true cost of your insurance increases, so the portion of your premium payment devoted to the cash value decreases. The insurance company typically invests the cash value, which continues to grow--tax-deferred--as long as the policy is in force. You can borrow against the cash value, but unpaid policy loans will reduce the death benefit received by your beneficiary. If you surrender the policy before you die (i.e., cancel your coverage), you may be entitled to receive some or all of the cash value. There are many different types of cash value life insurance, including whole life, variable life, universal life, and variable universal life.

Making a choice
Term insurance coverage typically costs less than cash value insurance coverage. However, the cost of obtaining a term insurance policy increases as you get older and if your health deteriorates. In contrast, these factors are taken into consideration when cash value insurance premiums are set. As a result, certain cash value premiums typically remain the same throughout the life of the policy. So although term insurance is typically cheaper during your younger years, the cost may eventually exceed that of cash value if you continue to renew your term policy.