Term Insurance VS Permanent Life Insurance
Insurance is one of the absolute necessities of ones life. Insurance covers the loss incurred to a person on account of natural calamities, accident or death or illness. Most of the people in developed countries have kept insurance in one form or the other. As per statistics it is the fifth largest expenditure for an individual. The choice of paying the premium is totally on the individual’s convenience; it can be yearly, half yearly, and quarterly or even a single one-time premium payment.
There are many kinds of insurance like the term insurance, the permanent life insurance, disability insurance, health care insurance, and personal insurance to protect the personal property of an individual, travel insurance and so on and so forth.
Term Insurance
Nowadays the term insurance has an optional benefit plan attached to it. It is the Accidental Death Benefit which provides an additional amount which is equivalent to the basic sum assured in case of death due to accident, or death within 90 days of the accident. The other optional benefit plan is the critical illness benefit which is a sum assured equivalent to the basic sum assured in case of six categories of critical illnesses. They are Heart attack, Cancer, Coronary artery bypass, organ transplant, kidney/Renal failure and stroke. The sum will be paid provided you survive for thirty days after the date of the claim. Once the claim is met on critical illness, there won’t be any further benefit payable on your policy.
Permanent life insurance is the combination of death benefits with saving component and tax exempted. For example a 25 year old if he purchases an insurance policy in term insurance will pay $25 as premium, whereas the same person if he buy a policy in the permanent life insurance plan may pay $100 as premium in which may be $25 will be kept for premium and the $75 will be sent into Saving component. As he grows older, the premium in the term insurance will be higher whereas in the case of the permanent life insurance, the same premium will be cut still a smaller portion of it will go the savings component. So it is advantageous to go for a permanent life insurance as it is beneficial in the long run and one doesn’t loose the premium paid as it was in the case of term insurance.
The term insurance is for a particular term and after the term ends, the policy holder will not get any cash value. He/she can renew the policy for another term but has to pay higher rate of premium. The permanent life insurance is better compared to term insurance as the former gets cash value, income tax exemption, can use it as collateral security to obtain loans etc.
There are some more differences between term insurance and permanent insurance. They are as follows:-
1. Term Insurance is for short term gains whereas permanent life insurance is a long term gain.
There are many ways to acquire a product, one can make down payment and buy the same, or by installments, or by paying a rent one can use the product for a particular period of time and give back the item once you no longer need the same. The difference between term insurance and permanent life insurance can be correlated with the above example. The term insurance can be connected with lease or rent whereas the permanent life insurance is connected with buying the product.
Term insurance is like leasing a SUV, you buy the death benefits for a term which may be five years, or ten years or more and once it is over, it is up to you to renew your policy or forget it. Permanent life insurance is buying the product and using it for ever. It is with you till you die. The insurance policy stays in force and is with you till you die. Finally it will pay the death benefit and it piles up the cash value also.
2. Term Insurance is cheaper, while permanent insurance is expensive.
Term insurance is needed mainly for those interested in death benefit. For example a parent who can’t afford much can go for term insurance for the child’s education or difficult job which involves traveling a lot. The premium is low and one can afford to pay easily and there is no cash value added to it. In case the policy holder wants to renew the term insurance the rate of premium will be higher than the previous term. In the case of permanent life insurance the premium is higher and as the years go by, the insurance is getting older and older; the premium will remain fixed for the life time.
3. Term insurance only has death benefits whereas permanent life insurance has many benefits.
The term insurance gives death benefit only if the policy holder dies before the term finishes. Permanent life insurance combines death benefit with cash value, and the beneficiaries are exempted from tax. People can convert the cash value into retirement fund.
4. Term insurance has no tax advantage.
In term insurance there is no cash surrender value so there is no tax advantage whereas in permanent life insurance, the cash values grow at a tax deferred rate. There is tax advantage to the permanent life of the person.
In the case of a term insurance, if the beneficiaries do not make any claim till the term specified in the policy expires, then the policy is worthless at the end of the term. The younger the policy holder the lesser the rate of premium as the chances of death is relatively low. The older the policy holder, the greater will be the premium, since he is more prone to get illness due to old age. It is better to go for a permanent life insurance if you are in the older age group.
5. Term Insurance means financial security and vice versa.
Term Insurance is affordable and the financial insecurity is avoided. In other words, the financial insecurity is eliminated at a cheaper rate whereas in the Permanent Life Insurance the financial insecurity is eliminated at a greater rate of premium, but it has its other advantages. For a value conscious customer, term insurance is worth opening. Joint life policy can be taken in the Term Insurance, but in case during the term of the policy, if one of them dies, the claim will be given, but at the same time the policy also terminates.
6. Perfect for people with young dependant families.
The Term Insurance is advantageous for the young people with dependants. Low premium helps the person to invest in some other savings schemes which have tax exemption policies. Since the premium is low, it is easy to maintain the policy during the change in your career. Term Insurance is a saving grace in times of sudden death of the policy holder when he/she has investment like cars and houses and a big amount of loan is outstanding.
For double income families, term insurance is better as it is cheaper as both the income is needed to meet the regular requirements as well as some investment plans. For single income families also term insurance seems to suit in a better way as they have responsibilities of dependent parents and children to look after.
It is up to any individual to decide whether to go for term life insurance or permanent life insurance plan. But always go for some insurance if you love your spouse, children and dependants as life is very unpredictable.