Comparing Permanent & Term Insurance
This lesson focuses on the following topics:
• Comparing Permanent and Term Insurance
• Term Life-Common Policy Variations
Permanent life policies differ from term life policies in several ways, including:
Higher Initial Premiums: Policy owner pays not only for a death benefit but also for
the cash value feature of the policy. Overall, permanent policies offer less insurance
protection per premium dollar than term life policies.
Greater Flexibility: The policy owner can use the cash value as collateral for a loan.
Some people buy permanent policies as a tax-deferred way to build an estate.
Dividend-paying policies usually provide an option to apply the dividends to pay all
or part of the premiums. Other permanent policies such as universal life provide for
payment of the cost of the policy if the policy has accumulated sufficient value.
Much Higher Agent Commissions: Insurance agents get higher commissions for
the “permanent insurance”. So the policy owner better keep this in mind if an agent
continues to recommend a “permanent life policy” when he/she is asked about “term
life policy”.
Important Points
􀂃 Remember that surrender charges and other expenses may consume all or most
of a policy’s cash value if the policy owner cashes it in early. It usually takes at
least three to five years to build any cash value.
􀂃 If the policy owner buys a “permanent policy”, try to continue his/her premium
payments for at least 15 to 20 years.
Historically, half the people who buy permanent policies drop them within five years.
Dropping a permanent policy can be costly, so the applicant should think carefully
before buying one.
Term Life - Common Policy Variations
Annually Renewable Term (ART)
􀂃 Policy owner may renew most ART policies up to age 100. However, ART
premiums are extremely high for middle age and older consumers. If the
policy owner has been paying high premiums, he/she may want to shop
around for a better value.
􀂃 An ART provides a fixed premium and death benefit for one year. When the
term ends, the policy owner may renew his/her policy, but the premium will
probably increase. To avoid yearly increases, some people look for 5, 10, or
20-year renewable term policies.
Decreasing Term
􀂃 This policy provides death benefits that decrease each year.
􀂃 Mortgage Insurance and Credit Life Insurance are examples of decreasing
term policies.
􀂃 The initial death benefit may equal or approximate the amount of the policy
owner’s loan, with the benefit decreasing as he/she pays off his/her loan. If
the insured dies, the insurance benefits pay off or reduce the loan balance.
􀂃 Important Point: You have a new contestable period with each new policy.