Traditionally, there are two categories of life insurance: term insurance and permanent insurance.
– Term insurance is designed to meet temporary needs and it provides protection for a specific period of time (the “term”). This type of coverage will pay the benefit amount of insurance to the beneficiaries of such a policy only if the insured person passes away during the term. Term life insurance often makes sense when you have a need for coverage that will disappear at a specific point in time. For instance, you may decide that you only need coverage until your children graduate from college or a particular debt is paid off, such as your mortgage.
The most typical periods of term coverage are annually renewable term, 5-, 10-, 15- and 20 years. The longest term period is for 30 year protection. Some insurance carriers still offer “return of premium” term coverage.
– Permanent insurance provides lifelong protection. As long as you pay the premiums, and no loans, withdrawals or surrenders are taken, the full face amount will be paid. Because it is designed to last a lifetime, permanent life insurance accumulates cash value and is priced for you to keep over a long period of time.
There are several types of permanent life insurance (traditional whole and universal life, including index universal life policies, as well as variable whole and universal life contracts).
Recently, some insurance companies have introduced new hybrid insurance that combines permanent life insurance benefit with long term care protection. Please see section “Long Term Care” to learn more about the concept.
Term and permanent life insurance can be used both in personal (family protection, retirement income, estate conservation) as well as in business planning (key person insurance, buy-sell agreements, etc.).
It’s impossible to say which type of life insurance is better because the kind of coverage that’s right for you depends on your unique circumstances and financial goals. But remember, the best way to figure out the amount and type of life insurance that makes sense for your particular situation is to meet with a qualified life insurance professional.