If you’ve been searching for life insurance coverage but have trouble understanding the difference between term and cash value life insurance, you are not alone. To make the choice even more complicated, hybrid products have emerged in recent years. The good news is it allows you to further customize your policy to better suit your circumstances.
To help make choosing the right policy easier, we are going to explain what these products offer, how they differ, and what you should consider before buying a policy. Here follows what we’ll cover:
- What is term life insurance?
- What is cash value life insurance?
- What are the pros and cons between choosing term and cash value life insurance?
- Final thoughts.
- Frequently asked questions.
What is Term Life Insurance?
Term life insurance is the most simple and inexpensive kind of life insurance coverage currently on the market. Just as its name implies, term life insurance provides coverage for a specific amount of time. It’s usually purchased in 10-, 20- or 30-year increments. Although it can be cheaper than any cash value life insurance, it has the potential to become expensive if it’s renewed multiple times. And if the insured dies past the term limit, the beneficiary will not be paid. What distinguishes term from cash value insurance is that there is no cash value component attached to the policy.
Most insurance companies will not issue term life insurance to those older than 75 to 80 years old or more. Term life insurance is ideally suited for young people in good health that can better afford lower premiums. This type of insurance is known for its riders that allow the policy to be customized according to your own specific needs. Some riders offer a payout if you are still living once the term ends. And others offer mortgage protection.
Just keep in mind, term life insurance never offers a cash value feature. Also, if you are selling a term life insurances policy for cash, be aware you must convert it to permanent life insurance for you to qualify for any kind of life settlement solutions, or to work with a viatical settlement provider.
Currently there are eight different types of term life insurance coverage to choose from.
Let’s take a deeper dive into these various term life insurance products so you can get a better idea if any one of them would be a good fit for you.
- Guaranteed Level Term Life Insurance: This is your basic bread and butter term life insurance. Your premiums are guaranteed not to go up during the entire length of time of the policy.
Who it’s best for: Those looking for life insurance coverage during a specific length of time and have no plans to renew the coverage once the term expires.
- Annual Renewable Term Life Insurance: This is life insurance that renews annually, but the premiums generally increase each year.
Who it’s best for: Those who only need coverage for a short period of time.
- Return of Premium Term Life Insurance: This type of insurance gives a partial or full refund for all premiums that are paid, but only if the insured is still alive at the end of the term. This incentive comes in the form of a rider that is often added to a Guaranteed Level Term Policy.
Who it’s best for: Those who believe they are likely to still be alive by the end of the life term policy.
- Decreasing Term Life Insurance: This type of policy is for those who have greater liabilities at the start of the policy and fewer liabilities at the end of the term. Mortgage Term Insurance is an example of Decreasing Term Life Insurance. It’s designed to help the insured pay off a mortgage in the event of death.
Who it’s best for: Those who have health problems and want mortgage protection coverage so their family can stay in their home in the event of their death.
- Modified Term Life Insurance: This kind of term insurance has premiums that increase over time or have alternative options other than traditional forms of coverage that are used for specialized financial planning.
Who it’s best for: Anyone that wants limited coverage at a low rate that will increase at a higher rate once their child is financially independent so they can save for retirement.
- Guaranteed Renewable Term Insurance: This is guaranteed to be renewed when the term expires with no underwriting requirements. You will be able to renew even when you are in poor health.
Who it’s best for: Someone who has poor health that doesn’t want to reapply for term insurance after the policy expires.
- Convertible Term Life Insurance: This type of coverage can be easily converted into a lesser amount for cash value life insurance when the term expires,
Who it’s best for: For those who are planning on selling term life insurance for cash, this is the ideal kind of policy.
- Family Income Benefit Term Insurance: This is ideal for policyholders concerned about beneficiaries mismanaging a lump sum of money that is a payout. Instead, the benefit is paid on a monthly or annual basis.
Who it’s best for: Policyholders who want to make sure their beneficiaries don’t spend their benefit payout irresponsibly.
What is Cash-Value Life Insurance?
Cash value life insurance (otherwise known as permanent life insurance) is different than term life insurance because it provides the insured with a lifetime death benefit. In addition, the policy includes a savings account that accumulates cash over time and is tax-deferable. Not surprisingly. this type of life insurance is more expensive and complicated than term insurance. Perhaps one of the biggest advantages of carrying a cash value life insurance policy is that you would qualify for senior life settlements, viatical settlements, or any other kind of life settlement solutions by simply selling a life insurance policy.
There are three kinds of cash-value life insurance:
- Whole Life Insurance: Also known as straight life or ordinary life, this is the oldest type of cash value insurance because it started more than 100 years ago. It’s called whole life because it’s meant to last a lifetime rather than a limited amount of time. It the most simplified cash-value form of insurance because both the death benefit and premiums remain fixed, but it’s also more expensive. These policies pay set dividends regularly that can be withdrawn in cash or grow within a policy to increase coverage or lower premiums.
Who it’s best for: It is ideal for those who want long-term protection with a cash value component tool that acts as a savings account and an estate planning tool.
- Universal Life Insurance: This is a more flexible form of life insurance because it pays interest based on current market rates.
Who it’s best for: Those who have higher cash reserves and have maxed out other investment options, so they need additional tax-deferred financial solutions.
- Variable Universal Life Insurance: This type of life insurance invests its cash value in stocks, bonds, and real estate. The cash value is not guaranteed so it rises and falls in conflux with the cycles of the financial markets.
Who it’s best for: The ideal candidate for a variable life insurance policy is a seasoned investor with a high tolerance for risk with a focus on faster financial growth.
Don’t lose your lifelong investment. Discover your policy’s value today.
Weighing the Pro and Cons of Term Versus Cash Value Insurance
The biggest difference between term and cash value insurance is that they both pay death benefits, However, only cash value life insurance provides permanent coverage with a cash value component. All potential policyholders should be clear about their objectives when buying life insurance.
You can start by asking these questions:
- What is the amount of coverage I need?
- What can I afford to spend?
- Do I need life insurance for a specified time, or do I want it for life?
Know that there are features like accelerated benefit riders that can help you decide between term and cash value life insurance. For example, if you want to add a long-term care rider to your term insurance it may be cheaper. Just understand it could expire before you need it. A cash value life policy will probably be better in the long run because you can more easily convert it to a viatical settlement or senior life settlement and you will not have to pay for a nursing home or managed care expenses out of pocket.
Similarly, you can use riders to cover mortgages or funeral costs. Know that these riders are only valid during the insurance term. Term life insurance is usually better for young families because they need a bigger death benefit at an affordable cost while raising children and paying off a mortgage.
By contrast, cash value life insurance is often used to protect your beneficiaries when they are adults. For example, it can be used to protect your heirs from exorbitant estate taxes. If you have a child with special needs, you can provide a safety net to make sure they have financial security and a caretaker once you are gone. Here are some guidelines that will determine which kind of insurance is best suited for you:
Choose Term Life Insurance if you:
- Need life insurance to replace your income when you are raising children and paying off a mortgage.
- Want affordable coverage.
- Would like cash value life insurance in the future but can’t afford it now. Most term policies can be converted into cash value insurance. Just make sure you know what the deadline date is for conversion.
Choose Cash Value Life Insurance if you:
- Want your insurance premiums to provide a death benefit for the beneficiary, but also offer savings and investment options.
- Want to access retirement savings and still leave beneficiaries with money for funeral and burial costs.
- Have a child with disabilities that needs personal and economic assistance in adulthood after you are gone.
- Want to provide a means of paying your estate taxes so your heirs won’t be forced to sell your assets to meet tax obligations.
Many factors determine the best life insurance for you, so be sure you get several quotes to have a good sense of what is available in the marketplace.
Also, know that when you’re close to retirement, you can reach out to a life settlement solutions broker or viatical settlement provider to sell your life insurance for cash. This can be used to enjoy your retirement, take your dream vacation, or simply fund long-term senior care. To learn more, use our life settlement calculator for an estimate to find how much your life insurance policy might be worth if you ever want to cash out. It could end up being one of your best reasons for owning life insurance!
Frequently Asked Questions
What happens to term life insurance when the term ends?
Once the term has ended, you will either need to buy the policy or go on without life insurance. However, if you have a policy with a guaranteed renewal, you will be allowed to renew the policy annually, albeit at a higher rate.
What happens when you sell your life insurance policy?
You can sell your life insurance policy to a third-party buyer that takes over your premium payments and becomes the beneficiary of the death benefit. In return, you receive a life settlement or viatical settlement.
Can I use my life insurance policy to obtain long-term care if I get ill?
Yes, you can, although you will have to convert your term life insurance into cash value insurance first to get a senior life settlement or viatical settlement.
What are viatical settlements?
When someone else buys your life insurance policy you can convert the capital into a viatical settlement, allowing you to pay for medical expenses incurred by a terminal or chronic illness.
Is cash value life insurance worth it?
Yes, if you want life insurance until you die and desire a cash-value component for savings and investment opportunities.
Are term life and cash value life insurance policies taxable?
Generally, they are not taxed but check with a tax advisor to make sure and find out about any tax advantages.
Can I withdraw money from my cash value life insurance policy?
You can, but only up to the amount you’ve already paid in premiums. Anything more than that will be taxable.
Don’t lose your lifelong investment. Discover your policy’s value today.