Term or Cash Value Policies

Life insurance policies can be divided into two main categories, term insurance and cash value insurance. A brief discussion of each, and their relative advantages and disadvantages, follows.

Term insurance. Term insurance provides a death benefit only. If you die while the policy is in effect (during its "term,) the insurance company pays; you don't die within the term, they don't pay. Such a policy is pure protection only, which should not be underestimated if you have younger children or children with special needs and your spouse will not be able to earn enough to provide for them in the event of your death. Term insurance is also frequently used as part of a business succession plan to provide cash should the sole-proprietor, partner or key shareholder die unexpectedly. However, a term policy has no investment (cash value) component to it. Although it's called "term" insurance because the coverage runs for a specified term (such as a year), most policies may be renewed at the option of the insured for as long as he or she is willing to pay the premiums.

While the some term insurance must be renewed annually, term policies are often written for much longer terms, such as five, 10 or 15 years. Although the cost of term insurance usually rises as the insured gets older, level-term policies are also available. These policies keep the premium at the same dollar amount throughout the term; although the premium will often jump more sharply for the next term than would be the case for the year-to-year rise for an annual term policy.

Cash value insurance. There appear to be a nearly unlimited number of types of cash value policies. While there are important differences between many of the options, they all have this in common: they provide a death benefit (term protection) and they provide an investment/savings feature. Cash value insurance is much more expensive than term (particularly at younger ages), but typically provides insurance throughout lifetime at a level premium. A policyholder normally can receive the benefit of these cash values during lifetime in one of two ways: (1) by taking a loan against them, or (2) by cashing in the policy (the policy will no longer be in force, but the policyholder will receive the cash surrender value).

• What are the pros and cons of term policies?
• What are the pros and cons of cash-value policies?
• Which is better, term or cash value?