The Two Types of Life Insurance


Some consumers find it odd to hear that there are really only two kinds of life insurance, but it’s true. Yes, within each of those two major categories, there are dozens of variations, but generally speaking, term policies and whole life policies (often called permanent contracts) are the two choices you have. There are advantages and disadvantages of each type, so it’s important to know the essential differences between the two. Here’s a quick rundown on why millions of people purchase term and whole coverage every year.

Why Buy Permanent Insurance?

Whole coverage has some key advantages, including the following:

  • It never goes down in total value and will never expire. The contract lives as long as you live. This is probably the single feature of this kind of coverage that attracts so many buyers. There’s a certain peace of mind to knowing that your income is protected no matter how long you live.
  • You can sell your policy for cash through a life settlement. If you ever decide that the premiums are too high for your income level, want to get quick access to the cash in order to pay off medical or other bills, or feel you don’t need the death benefit anymore, a life settlement can make good sense.
  • Your cost is locked in and the amount you are charged never changes. This is another component of the peace of mind Many consumers like the idea of a fixed price product.
  • Policy holders can borrow against the built-up cash value. As time passes, you build more cash value and thus can borrow more. Conditions on borrowing are usually rather lenient in terms or repayment and tax treatment. That’s why many people view this kind of coverage as a financial backstop in times of hardship.
  • The dollar value of the death benefit, or payout, is fixed and guaranteed. You’re never in the dark about what your loved ones will receive upon your demise. In fact, a large number of people shop for products based on very exact death benefit amounts. A common rule-of-thumb is to aim for a payoff amount equal to or greater than three years of your annual income.

Why Buy Term Insurance?

This kind of coverage is an entirely different creature than permanent coverage. Sales of term contracts continues to be very strong because millions of consumers are not interested in anything more than a fixed-dollar death benefit. Here are some of the main pluses of these policies:

  • Simplicity: Simplicity is the main feature here, meaning that you won’t have to do a bunch of math or consult with a CPA to figure out what you’re getting and what you’re paying. You will need to do price comparisons but that’s rather easy when the only real factors at play are the length of the term and the death benefit. Of course, you still want to buy from a reputable seller to make sure that the death benefit is assured.
  • Low cost: Prices are low because you are buying nothing more than a final payoff amount, the death benefit. Note that term insurance is quite popular and that all of the world’s top companies offer this kind of coverage.
  • Flexibility: You can generally get terms that range from one year up to 30 years, and death payout amounts from just a few thousand to millions of dollars.