Free Essay: Comparison Between Term Insurance and Permanent Insurance

Most individuals purchase insurance due to the love they have for their loved ones who might be affected by their death. Life insurance is a very vital component for every family's financial well-being. To offer adequate protection for one's dependents, one needs to know that there exist two types of insurance; term insurance and permanent insurance. For one to ensure that they select the best affordable policy which will address their needs, they must understand the difference between the two types of protection. Permanent insurance refers to life insurance whereby the policy is often valid for a lifetime while in the case of term insurance; the policy is usually valid for a specific period which tends to vary from about five years to 30 years. The significant components differentiating these two types of insurance are the duration/ length of coverage, the cost, the cash value as well as the dividends.

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Firstly, the core difference between term insurance and permanent insurance is the coverage duration, which is the sufficient period of a policy. In term insurance, the original form of life insurance is considered to be the pure form of insurance protection whereby the death benefit is to be paid by the insurance company when the insured dies during the term. Still, no benefits will be paid on the maturity of the term. The duration of term insurance, as the name implies, its validity period is usually 5 to 30 years long. It provides temporary protection for the insured. As for permanent insurance, the policy is often valid for the lifetime of the insured individuals and the death benefit is usually paid whenever it occurs. From a risk management perspective in permanent insurance, insurance is served as a means to transfer the risk. Thus, term insurance transfers the partial risk of death due to a constraint, while permanent insurance provides lifelong financial protection as it accepts 100% risk.

Furthermore, the cost structures about premiums for the two types of insurances are different, resulting in a varying cost. The term insurance premium follows an increasing pattern meaning that the terms are averaged throughout the coverage. If an individual is in good health and the purchased term insurance are at a young age, the premium will often start at a lower age for the term insurance. However, premiums can often increase dramatically when term coverage ends. Term insurance follows an increasing-premium pattern; its dividend will be renewed to a higher rate in 5 or 10 years and keeps the same pattern until the end of the policy. On the other hand, permanent insurance has a level premium until it reaches the end of the policyholder's life; this is because the premiums of the permanent insurance are often higher since they tend to be averaged over the length of the insurance coverage. Though permanent insurance has a higher premium at first, it maintains constant throughout the whole time, which means it is protected from inflation; therefore, permanent insurance will have a lower cost for premium eventually.

Additionally, the investment/cash surrender value or cash-in feature of permanent insurance serves as a tool to invest, which can offset some cost of the premium. The permanent insurance may or may not include these cash values. The whole life may have cash values with some universal life policies having some investment options. In contrast, term insurance does not offer this feature due to its structural design. So, to sum up, due to different premium patterns, and cash value surrender features, the cost for both insurances are diverse. Precisely, term insurance is just like an everyday vanilla insurance policy which lacks savings components buy term as one invests the differences as the saying goes. Term insurance is convertible during a specific period, meaning that the policyholder has the option to convert term insurance into permanent insurance without any health screening for approval. However, permanent insurance does not support the reverse, and it requires a medical exam if someone has the intention to purchase permanent insurance.

Lastly, another differentiating component between the two types of insurance is dividends. Not every permanent life insurance policy tends to pay policies; however, this option is often available at all the mutual insurers majorly because the owners of the company are often the policyholders. The working of the whole life insurance is; every year, the insurers usually deduct all the expenses like the death benefits paid as well as the costs incurred when running the business. From the money the insurance has made, investments, premiums and any other source of income are often collected, and any net profit is usually paid as a dividend. As for the term insurance, the traditional universal life and the variable universal life does not pay dividends. The dividends act as an addition to all the guaranteed rates of the cash values growth, which is often provided by the life policy.

In conclusion, the coverage duration, cost, cash value and dividends are the significant aspects that make term insurance and permanent insurance different. Life insurance should not just replace an individual's assets, but it should also supplement them. When it comes to term insurance versus permanent insurance, everyone wants what's best for their dependents. These help an individual to assess their current financial situations and their overall goals before deciding on which insurance to purchase.