When you are in the market for life insurance one of the most puzzling questions you’re faced with is if term life insurance is better than cash or vice versa? When you are faced with choosing between both these two fundamental types of insurance policies you need to consider the coverage that each has to offer, the length of time the overall coverage will last and the amount you can afford to easily spend.
Term Life insurance
Term life is also often called pure insurance mainly because they provide coverage for a specified time period. Generally, you can purchase a term insurance policy for a period starting from 1 year to 30 years. This means that if you pass away during this period the beneficiary will receive this death policy. However, if you don’t die during the term the beneficiary will get nothing. When the term ends so will your coverage.
That said most companies will allow you to renew the policy without going through a physical exam but in most cases the premium will be much higher. The other thing you need to be aware of is when you reach a certain age 70+ in most cases, it will become very difficult to get any type of term coverage, and even if you do you’ll need to pay very high premiums.
Term life insurance has many variations. One of the most common of these variations is the buy a level death benefit or even a decreasing death benefit where the premiums will increase each year or will remain level for a certain number of years. You’ll need to get a few term life insurance quotes and compare them against each other to figure out the best one for you.
Cash value life insurance
This type of insurance is often referred to as permanent life insurance, because it has been designed so that you pay a certain “levelized” amount of premium as long as you are alive. There are some instances in which you may fund a cash value policy so that its cash value can later be used to pay your future premiums. As long as you pay your premiums your insurance policy will continue to cover you throughout your life regardless of health and age.
As people pay their premiums a portion of each of their payment is placed within the cash value account. Initially all the initial payments you make mostly go to the cash value contribution. But as you become older and so kicks in the true cost of your insurance which merits an increase, so the portion of the premium payment you initially devoted to the cash value will decrease.
The cash value will continue to grow, it becomes tax deferred as long as the insurance policy is in force. Most people will find it easier to borrow against the cash value of your policy but the unpaid loans will reduce the overall death benefit that the beneficiary receives. Also, if you happen to surrender the policy prior to passing away you will get the policy’s cash value but minus surrender charges and loans. There are various variations of this type of insurance policy which includes universal life, variable life and whole life.
Choosing the right policy
If you are looking for a cheap policy then term life insurance is cheaper as compared to its cash value counterpart when you are young. Mainly because the cost of your policy is based mainly on how old you are. The overall cost may eventually go beyond the cash value if you continue to renew the policy. These factors should be taken into consideration when the premiums are set. This is why the premiums of cash value policies will remain the same.
There are some instances where the choice may be clear because your insurance needs are so large that you can afford it by only buying a term insurance. Also, you may just need life insurance coverage for a few years. That said if you can afford the higher premiums, plus you no longer need long term protection then consider getting cash value insurance.
Regardless of what insurance policy you decide to buy always compare life insurance quotes. These will tell you what types of insurance will fit within your budget prior to making a final decision.
License: Image author owned
Mark has been an insurance consultant for over two decades. He is also a financial expert who now works for one of the leading insurance companies in Australia.