Understanding the differences in life insurance

Q. What’s the difference between a whole life policy and a permanent policy?
— Trying to learn

A. Life insurance is typically categorized into two types: temporary and permanent. Whole life is a kind on permanent policy.

More on that in a moment.

Term life insurance is death benefit only.

It’s considered a temporary benefit because it either expires after a certain time period, such as 10, 15 or 20 years, or needs to be renewed or automatically at what’s usually a much higher premium, said Ed Gaelick, a Chartered Life Underwriter and Chartered Financial Consultant with PSI Consultants in Glen Rock.

He said the bottom line is all terms plans will eventually expire at some point.

Whole life is often referred to as “permanent” as it is good for your “whole life” and won’t ever expire, provided you pay your premiums, Gaelick said.

“Whole life provides death benefit and builds value while you are alive,” he said. “Premiums are fixed when you get in so there are no premium increases.”

He said some whole life policies include a provision whereby the policy will “borrow” money from its cash accumulation automatically should an insured forget to pay a premium. This keeps the policy in force, where a term plan would lapse for non-payment if you forget to pay because there is no living cash value to borrow from with term.

Gaelick said there are some newer types of policies that will guarantee benefits to death which could be called “permanent.”

“Usually these types of policies — universal life with secondary guarantees — are designed to build no cash value so they will lapse unless premiums are paid,” he said. “Universal life with secondary guarantees can be called a `super term policy’ that is `permanent’ and has a place in certain planning.”

If you’re considering any kind of life insurance policy, consider meeting with an experienced broker who can properly explain the different types of life policies to you so you can determine which is the most suitable for your specific circumstances.

Karin Price Mueller writes the Bamboozled column for The Star-Ledger and she’s the founder of NJMoneyHelp.com. Click here to sign up for the NJMoneyHelp.com



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