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Life Insurance: What’s the difference between permanent and term insurance?
Life insurance is a valuable tool for protecting your loved ones financially in the event of your untimely death. There are two main life insurance types: permanent and term insurance. Both have unique benefits, and choosing the right insurance for your needs requires careful consideration.
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Permanent Insurance
Permanent insurance, as the name suggests, provides coverage for the policyholder’s entire life. This type of insurance can be further divided into two categories: whole life insurance and universal life insurance.
Whole Life Insurance: Whole life insurance provides coverage for the policyholder’s entire life and comes with a fixed premium. It also has a cash value component that grows over time and can be borrowed against or withdrawn. This type of insurance is more expensive than term insurance, but it provides a guaranteed death benefit and can also be used as an investment vehicle.
Universal Life Insurance: Universal life insurance also provides coverage for the policyholder’s entire life, but the premiums and death benefit can be adjusted over time. It also has a cash value component, which can be invested in various sub-accounts. This type of insurance provides more flexibility than whole life insurance but can also be more complex.
- Term Insurance
Coverage needs
Consider how much coverage you need and for how long. Permanent insurance provides coverage for the policyholder’s entire life, making it a better option for long-term financial goals. On the other hand, term insurance is appropriate for short-term financial obligations.
Here are some examples of situations where you might choose permanent insurance versus term insurance:
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Permanent Insurance might be Appropriate if:
- You want to provide financially for your loved ones, regardless of when you pass away.
- You want to leave a legacy to your children or grandchildren.
- You want to use the policy’s cash value component to borrow against or invest in other financial goals, such as paying for college or retirement.
- You want to ensure that your final expenses, such as funeral costs, are covered.
- Term Insurance might be Appropriate if:
Premiums
Permanent insurance policies are typically more expensive than term insurance policies. This is because permanent insurance offers coverage for the policyholder’s entire life and has a cash value component, which can be used for investment or borrowing purposes.
Term insurance policies provide coverage for a specific period and do not have a cash value component. Term insurance policies are initially more affordable than permanent insurance and will increase at the end of each term.
Choosing a policy that fits within your budget and provides the coverage you need for your financial goals is essential. We can help you evaluate the costs and benefits of each policy and help you make an informed decision.
Cash Value
One of the key benefits of permanent insurance policies is the cash value component. Over time, the policy accumulates a cash value, which grows tax-deferred and can be used for various purposes. This cash value can be borrowed against or withdrawn for financial goals such as paying for college or retirement. As a result, permanent insurance policies can also serve as an investment vehicle.
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