Term vs. Cash Value Life Insurance

Which type of life insurance is better–term or cash value? Insurance buyers have been asking this question for generations. When deciding between these two fundamentally-different alternatives, you must think about the coverage you need, the money you have to spend, and the length of time you need the coverage to continue. In some cases, you may not need life insurance coverage at all. But if you decide you do, then here are some general guidelines to follow.Term Insurance
Term policies provide life insurance coverage for a specified period of time. You can typically buy term insurance for periods ranging from 1 to 30 years. If you die during the policy period, your beneficiary receives the policy death benefit. If you don’t die during the term, your beneficiary receives nothing. At the end of the specified policy term, your coverage simply ends. You may be able to renew your policy without a physical exam, but (usually) at a higher premium. Once you reach a certain age, typically 70 and older, you may find it difficult to get term insurance coverage–and if you can, the premiums will be very expensive. There are several variations of term life. You can buy a level death benefit or a decreasing death benefit with premiums that increase annually, or that are level for a period of years (5,10,15, 20, 25, or 30).

Cash Value Insurance
Many different types of cash value life insurance are available such as:

• Whole life
• Variable life
• Universal life
• Variable universal life

Cash value insurance, often called “permanent” insurance, is designed to have you pay a “level” premium throughout your life. In some cases, you may fund a cash value policy in a way that the cash values can be used in later years to pay future premiums. As long as you continue paying your premiums by whatever means, cash value life insurance continues throughout your life, regardless of your age or your health. As you pay your premiums, a portion of each payment is placed in the cash value account. The cash value continues to grow–tax deferred–as long as the policy is in force. You can borrow against the cash value, but unpaid policy loans will reduce the death benefit that your beneficiary will receive. If you surrender the policy before you die (i.e., cancel your coverage), you’ll be entitled to receive the cash value, minus any loans and surrender charges.

Making a Choice Term insurance coverage typically costs less than cash value insurance coverage when you’re younger, but because the cost of a term policy is based on your age, the cost may eventually exceed that of cash value if you continue to renew your term policy. In contrast, these factors are taken into consideration when cash value insurance premiums are set. As a result, certain cash value policy premiums typically remain the same throughout the life of the policy.

In some cases, the choice may be clear. For instance, your insurance need may be so large that the only way you can afford to meet it is by purchasing lower-premium term insurance. Or, you may need the coverage only for a few years, again making term insurance the logical choice.

The Lightship Way
We generally steer our clients into term insurance, due to the lower monthly premium payments. If the client has long-term investment goals, we will recommend investing the difference (the extra dollars that would have been spent on a similar cash value policy) into a Roth IRA or other investment account. This solution accomplishes the insurance and investment goals of the client with minimal fees, limitations, and potential penalties down the road.

However, if you don’t think you can stick to a term policy/Roth IRA plan, and you would prefer to simply have one large account to accomplish your insurance and investing goals, then a cash value insurance option should be considered.