Types of Life Insurance
Jan 13, 2012 / By: Charles B. Pyke Jr., Estate Planning Attorney / Category: Life InsuranceMost people purchase a life insurance policy at some point. Often, life insurance is offered as part of employment or as part of affiliation with a union or other group. The basic function of all life insurance is to provide financial security to a beneficiary upon your death. Although the basic purpose of life insurance is accomplished by all types of life insurance, it pays to understand the difference between the two main types of life insurance from a financial perspective.
Life insurance comes in two basic types — term and permanent life insurance. Variations of the two main types have evolved over the years, but understanding the principal differences between term and permanent life insurance policies is a good place to start.
A term life insurance policy is purchased solely for the purpose of providing money to a beneficiary, or beneficiaries, upon your death. A term life insurance policy is not an investment. All policy premiums are lost once paid, meaning the policy does not accrue equity. The benefit to a term life insurance policy is generally the lower cost of the premiums. Because a term life insurance policy does not offer any growth on the capital invested, the premiums are usually significantly lower than premiums for a whole life policy.
A permanent life policy, on the other hand, offers both financial security for loved ones as well as investment potential for the policy owner. While a permanent life insurance policy does provide benefits upon the death of the insured, it can also provide a cash reserve that can be accessed at any time by the policy holder. A “loan” can be taken out against the value of the policy by the policy holder once enough funds have accrued in the form of premium payments. Premiums are often higher for permanent life insurance policy, but are also typically fixed.
Pyke & Associates, P.C. is a member of the American Academy of Estate Planning Attorneys.
Tags: permanent life insurance, term life insurance
