Comparing Temporary and Permanent Life Insurance

There are two general types of life insurance - temporary and permanent. Term insurance is another name for temporary insurance which means it is only in force for a limited period of time, typically ranging from 10-30 years. Permanent life insurance, on the other hand, offers lifelong protection. The beneficiaries receive a payment when the policy holder dies.

Term policies are only in place for a certain amount of years, and a cash value is not accumulated with the product. This type of insurance is typically purchased when the buyer has a financial need that will eventually go away. For example, a mortgage or a child's education fees can fall into this category.

Three main items should be considered when looking for term insurance:
• Death benefit
• Premium
• Term of the policy

The death benefit can remain constant or it can decline as the term progresses. The premium has the opposite options; it can either remain level or increase. Finally, the term of the policy can be for one or more years.

One option that is available with a term policy is a return of premium. This feature usually comes with more expensive premium payments; however, a portion of the premiums will be returned if no claim is made against the policy.

Permanent life insurance, in contrast, is for the life of the policy holder unless the premiums are not maintained. Permanent insurance does accumulate a cash value. The main types of permanent life insurance are whole, universal, and variable.

Whole life insurance is associated with level premiums and the beneficiaries are guaranteed a certain level of death benefits. Premiums are fixed. Whole life policies are considered inflexible by some investors. In addition, the rate of return may not be as high as other savings alternatives.

The inflexibility associated with whole life is why universal life products were created. They were developed in the 1980s and are hybrid products that combine the low cost protection of a term policy with the savings element of a whole life policy. Owners are able to adjust the premium payments. In addition, variable universal and equity indexed universal policies allow the owner to have a potentially higher rate of return than a fixed universal policy.

Temporary life insurance is usually cheaper than permanent life insurance. Temporary life policies can also be renewed at the end of their term and can usually be converted to a permanent policy. The one disadvantage to term life insurance is that the policy can usually not be renewed after the owner reaches the age of 80. In addition, the premium payment will increase as the age of the owner increases.

When looking for any type of life insurance, whether it is temporary or permanent, it is important to purchase the policy from a company that is in a good financial position. One way that a customer can determine the financial strength of the companies is by investigating the company's financial ratings from independent agencies such as AM Best.