Insurance 101 - Term or Permanent

A couple weeks ago I wrote about . We discussed some reasons why we need to have an honest discussion with our family about life insurance. Since the last post, I have received several questions about the difference between Term Life Insurance and Permanent Life Insurance. So I am going to use today's post to explain some of the main differences between the two types of life insurance policies.

I like to use the example of buying or renting a home to help explain the difference between Term or Permanent Life Insurance.

A Term policy is similar to renting a home. When you rent a home you agree to have access to a home for a certain period of time for a predetermined monthly payment. As long as you make your payment each month, your landlord agrees to let you stay in his home. When your contract has expired you and the landlord can agree to extend the contract. At that time if market conditions have changed the landlord may ask that you pay more for the right to rent his home. A Term policy is very similar.

With a Term policy you agree to pay the insurance company a set monthly payment for a set period of time. As long as you continue to make the payment, the insurance company agrees to honor a claim and pay the agreed upon benefit. After the set period of time (Usually 10, 20 or 30 years) you can obtain a new policy. Like the landlord, the insurance company may ask you to pay more to receive the same benefit.

A Permanent policy is very similar to buying a home. When you buy a home you are probably going to obtain a mortgage to purchase the property. The mortgage will require a payment for a certain period of time. As you make these payments you will build up equity in your home. The home market value may even increase over time. When you have fulfilled the payment requirements, unlike a renter, you will own the home. A Permanent policy is very similar.

The intent of a Permanent policy is that you will be insured for the rest of your life. Most Permanent policies have a time period that you will make payments. As you make your payments, like your home, you will build up some cash value (like home equity) in your policy. Over time this cash value may also increase in value (like the market value of your home) as the insurance company pays you interest on your cash value. The goal of these policies is to eventually be "paid up." This is similar to when you pay off your mortgage. Just like your home you own the cash value in the policy and can sometimes borrow against it.

Life insurance can be complicated as there are many different options to protect you and your family. To determine which is best for you, talk with your local experience insurance professional.

As always if you have any insurance questions feel free to contact me whether you have a policy with me or not. I'm here to help.

The bitterness of poor coverage lingers long after the sweet price is forgotten.

Joe Urvina is an insurance agent located in Gig Harbor, WA.

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