Term Life Insurance or ‘term assurance’ provides for life insurance coverage for a specified term of years for a specified premium. Generally speaking, term insurance does not accumulate cash value. Term is generally considered “pure” insurance, where the premium buys protection in the event of death and nothing else.
Permanent Life Insurance is life insurance that remains in force until the policy matures, unless the owner fails to pay the premium when due (the policy expires or policies lapse). The policy cannot be cancelled by the insurer for any reason except misrepresentation in the application, and that cancellation must occur within a period of time defined by law (usually two years), or fraud indefinitely. Permanent insurance may build a cash value. The owner can access the money in the cash value by withdrawing money, borrowing the cash value, or surrendering the policy and receiving the surrender value.
While there are no restrictions on the use of an insurance policy’s cash value, an increasing number of people use these funds as an additional source of retirement income. They will purchase a policy during their high-income earning years and, due to the tax exempt status of the policy, can make significant premium deposits on a tax-deferred basis. Of course, while building the cash value of their policy, they also enjoy the ongoing life insurance protection that the policy provides.
When their income decreases at or near retirement, these individuals can access the cash value of the policy either by withdrawal, policy loan, or a loan from a financial institution with the policy as collateral. This can be a terrific supplement to their retirement income.
There are many different options available for both term and permanent life insurance. It is advisable to complete a thorough evaluation to determine what type of insurance is best suited to meet your individual needs.