Term Insurance Vs. Cash Value Insurance

What is the difference between the different life insurance policies called term insurance and cash value insurance?

Term Insurance vs. Cash Value Insurance

Life insurance...most people don't like to think about it, but most people need it. You protect your car and house, but what about your biggest asset? Yourself. Most things in your life right now are liabilities. The rule of thumb is that if something is taking money out of your pocket, it is a liability. Anything putting money into your pocket is an asset. Your house and your car, unless they are paid off, are liabilities. You and your income, on the other hand, are assets. Life insurance, unfortunately, does not insure your life, thus, it would be better to call it income protection, since it is used to provide income to a family in the event of an untimely demise.

Know What You Need

One rule of thumb is to multiply your income by 10 and that is the amount of life insurance coverage you will need on yourself. For example, if you currently make $50,000 a year at your job, you will probably need $500,000 coverage. This will provide a $50,000/year income to your family for at least 10 years (even more if invested properly).

Term Insurance vs. Cash Value Insurance

In a nutshell, term insurance is pure protection. You can compare it to car insurance, in that way. It is used only to provide coverage in the event of a death. Cash value, on the other hand, is protection coupled with a savings vehicle. In other words, your monthly premium for a cash value policy is split up to pay both for the protection and for an investment. Cash value comes under many different names like whole life, universal life and variable life, but the protection under a cash value policy is always term.

Term insurance is just that: protection that you purchase for a specified amount of time, like 20 or 30 years. The theory is that when you are younger and have more debt, a mortgage, young children and little in savings, you need that extra coverage, but as years pass and you have little to no debt and more in savings and retirement, you do not need that coverage anymore. However, if you feel you still need the coverage, you can usually choose to keep the coverage and either pay a larger premium or pay the same premium and have a yearly decrease in coverage. Also, a term insurance policy is a lot less expensive per thousand dollars of coverage than your normal cash value policy, especially if you choose to purchase a level premium policy. In other words, you get more protection power for your dollar.

Cash value insurance, on the other hand, is quite a bit more expensive. The reason for this is that you are not only paying for your life insurance coverage, but part of your monthly premium is going towards an investment. Unfortunately, most times these investments perform very poorly and, by the time you stop paying for your coverage, your investments are gone. Also, unlike term insurance, you are usually paying for protection for most of your life, not just 20 or 30 years.

Many well-read financial advisors and most publications point the consumer towards term insurance. However, because of the large commissions earned on cash value policies, many insurance agents usually do not bring up the possibility of buying a straight term policy. As a consumer, make sure you always inquire about term insurance or deal with insurance agencies that deal only in providing term insurance to their clients.

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