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Term Vs. Cash Value

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Term Vs. Cash Value

Which one is best?

Before you decide what type of insurance to buy, you should first determine how much insurance coverage you need, and how long you need it for.  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 higher premiums for 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 the benefits and drawbacks of 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 policy without a physical exam. 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 be expensive. You may also find it difficult to get term insurance coverage if you develop a medical condition.

Cash value insurance
Cash value insurance (often called "permanent insurance") combines death benefits with a savings component (the cash value).  As you pay your premiums, a portion of each payment is set aside to create the cash value.  Another portion is taken out of your premium to pay the mortality and other costs.  As you get older, the mortality cost increases.  At some point your premium no longer can cover the the mortality and other costs, so the policy uses some of your stored cash value.  The ideas is to have enough cash values stored along with a level premium to keep your policy inforce for life.  If you do not have enough values stored and your costs exceed your premium the policy will lapse and you will no longer have any coverage.  Another benefit is you can borrow against the cash value.  However, any unpaid policy loans will reduce the death benefit paid to your beneficiary. If you surrender the policy before you die (i.e., cancel your coverage), you may be entitled to receive some a refund of some or all of the cash value.

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. This simplified example illustrates how the cost of an equal amount of term and cash value insurance might compare as you age:

Age

Annual Premium for Term Insurance

Annual Premium for Cash Value Insurance

20

$250

$1,250

30

$350

$1,250

40

$500

$1,250

50

$900

$1,250

60

$2,500

$1,250

70

Typically Not Available

$1,250


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