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Term Life vs. Cash Value Insurance

Life insurance is classified into two broad categories: term and permanent. Because term life insurance can be limited to a duration of 10 to 30 years one does have an option of extending the term to increasing premium after the duration. The problem is that this can get very expensive as you age. Depending on your circumstances, you may desire the affordability of term life insurance, which is often used to cover temporary, short-term commitments such as a mortgage. Alternatively, you may choose the lifelong protection and cash value provided by the majority of permanent life insurance plans.

Cash-value life insurance can serve as a fixed savings account, dividends-based, index base income, or investment account based on the option you choose. Generally, you may withdraw or borrow from a cash value account throughout your life. Permanent life insurance comes in a variety of forms, including whole life, universal life, and variable life.

Variable life is a product that needs to have an asset under management license and is purely based on the stock market, one must consult a licensed professional and understand the true risk involved in owning a policy as you can lose a large chunk of your cash values.

Additionally, a form of whole life or permanent insurance known as final expense insurance is available to cover end-of-life expenses, such as burial, memorial, medical debts, and outstanding bills.

What is Cash Value Life Insurance?

Cash value insurance is a kind of life insurance that combines life insurance with a savings component.

Cash value insurance, often known as permanent life insurance, gives the insured an opportunity to pay a "level" and/or flexible premium for the duration of the life. In certain instances, you may finance a cash value insurance in such a manner that the cash value growth dividends may be used to pay future premiums in subsequent years. As long as you continue to pay your premiums, regardless of your age or health, cash value life insurance will give you coverage of the insurance until the death benefit is paid.

As you make premium payments, a part of each payment is credited to your cash-value account. During the policy's early years, the cash value contribution accounts are lower due to the cost of insurance policy acquisition.

As you age and your insurance's true cost grows, the fraction of your premium payment allocated to cash value drops (due to the cost of insurance increasing as you age).

The cash value component of a cash value life insurance can continue to increase, tax-deferred, for the duration of the policy's existence. Although you may borrow against the policy's cash value, the outstanding policy loans lower the death benefit received by your beneficiary. If you surrender the policy before dying or terminate your coverage, you will be entitled to the policy's cash value, less any debts, and surrender penalties. And or you may lose the tax-deferred growth.

Examples of Cash Value Life Insurance:

  • Final Expense (FE),

  • Whole Life

  • Guaranteed Universal Life ( GUL)

  • Universal Life (UL)

  • Indexed Universal Life (IUL)

  • Variable Life (VL)

  • Variable Universal Life (VUL)

How is Term Life Insurance Different from Cash Value Life Insurance?

Unlike cash value insurance, which is permanent insurance spanning your lifetime, term life insurance only provides insurance coverage for a specific period of time. Typically, term insurance is available for terms ranging from one to thirty years unless you have bought an annual renewal term insurance, which gets very expensive as you get older. If you die within the policy's term, the policy's death benefit is paid to your beneficiary. If you do not pass away within the term of the policy, your beneficiary is not compensated.

Comparatively, cash value life insurance provides coverage until the death of the insured or until they turn 120 years old or as issued by the insurance company with the age limit. If the insured is alive at 120 years old, cash value life insurance terminates and pays out the full death benefit and the accumulated cash value to the insured.

With term life insurance, coverage automatically terminates at the conclusion of the stated policy term. You may be able to renew your coverage without undergoing a physical examination, but the premium will be higher because it is based on your age at the time of the renewal. Unless you have exercised the conversion provision per your written policy provisions. The older you are, the higher the premium and shorter the term of the policy. Once you reach a particular age (often 70 or older), it may be difficult to get term insurance – and even if you can, the premiums would be much higher.

Term life insurance comes in a variety of forms. You may purchase a level death benefit or a decreasing death benefit with yearly premium increases or premiums that remain constant for a certain number of years (5,10,15, 20, 25, or 30).

Term insurance is generally less expensive than cash value insurance when you are younger. Still, since the policyholder's age determines the cost of a term policy, the cost of a term policy may ultimately surpass the cost of a cash value policy if you continue to renew your term policy.

On the other hand, these factors are taken into account when determining cash value insurance premiums. Cash value insurance premiums are typically fixed for the duration of the policy.

In certain circumstances, the choice of life insurance is obvious. For example, your insurance need may be so great that the only option to satisfy it is to get low-cost term insurance. Alternatively, you may only want coverage for a few years, in which case term insurance is the best option. On the other hand, cash value insurance may be a good option if you can afford higher rates and require long-term protection.

In certain circumstances, having two forms of life insurance coverage can be a good idea. If you desire some life insurance at the time of your death, for example, you may purchase the majority of your life insurance as a term and a lesser piece as cash value. If your need for life insurance reduces, you may choose to cancel or reduce the term policy and keep the cash value policy. It is also feasible to purchase term insurance that can subsequently be converted to a cash value permanent life policy.

If you have questions about life insurance in Texas, seek advice only from experienced state-licensed insurance professionals.

Term Life vs. Final Expense

Final expense insurance is a permanent type of life insurance policy typically used to cover the costs associated with a person's cemetery, burial, funeral, memorial and medical debt, and settle any outstanding bills. Final expense insurance, funeral insurance, and burial insurance are sometimes used interchangeably. There are, however, significant distinctions between these two forms of insurance. Notably, the final expense insurance policy proceeds are payable upon the insured person's death. The insurance's face value, or death benefit, may be paid directly to the named beneficiary, cemetery, or funeral home. After the policyholder's death, the proceeds of the insurance policy provided to the beneficiary may be used for any purpose.

Final expense insurance is intended to assist in ensuring that there is sufficient money available to cover the funeral expenses and the final bills (usually medical and taxes) of the deceased. Hence, final expense insurance is a form of permanent life insurance. On the other hand, term life insurance is a temporary life insurance which is active for a period of time, such as for 5, 10, 20, 30 years, or annually renewed, with significantly higher premiums, as you age.

Final expense insurance policies may be issued swiftly, within hours or days, without requiring an in-person medical evaluation. Premium payments for final expense insurance policies are pre-determined and will not grow over the policy's duration. In contrast, term life insurance requires a medical examination which the insurance company uses to assess the risk and set the premium. A term life insurance application may be denied if the applicant has a high-risk medical condition, hazardous hobbies, or important information is left off the application. The face value, or death benefit for a final expense is typically up to $50,000, while the amount of a death benefit for a term life policy may be up to $2 million and beyond, depending on the net worth and the needs.

Generally, final expense insurance is a viable choice for seniors seeking a way to protect their loved ones from funeral costs. Per the National Funeral Directors Association (NFDA), the national median costs for a funeral in 2021 was over $7,800, while in Texas the average funeral cost was closer to $6,200. Many individuals looking into life insurance at an older age may find final expense insurance policies a popular option.

Conversely, term life insurance is a form of life insurance policy that pays a set death benefit if the insured person dies within the specified period of coverage. Term life insurance derives its name from being active only for a certain period. This implies that the policyholder must typically renew their coverage after the term expires in order to ensure another "term" of coverage.

Most insurance firms offering life insurance offer term life insurance, which is often lauded as an affordable kind of life insurance coverage. Enrolling in a term life insurance policy beyond the age 65, on the other hand, may cost much more than a final expense insurance policy. Although term life policies are more appealing to young people, final expense insurance is attractive to seniors who want to leave money to their loved ones but are unable to acquire a traditional life insurance policy. Also, unlike term life insurance, final expense insurance does not have an expiration date.

Term life insurance is suitable for people looking for low-cost life insurance coverage to protect themselves in the event of an accident or catastrophic events in one's life. A term life insurance policy may deny you coverage based on your age or overall health. Since term life insurance contracts are only in effect for a limited time, they are comparatively affordable. However, term life policies are not permanent. You may outlive your policy and must decide whether to let it expire, renew it, or upgrade to permanent insurance. Some insurance companies have a refund of premium term insurance policies and they can be up to 30 years, however, the premium refund is available every five years. The insured can get a full refund upon surrendering the policy if one has no need to carry the policy. Please check with an experienced state-licensed agent on the details.

Final expense insurance can be split into three forms:

  • Traditional final expense insurance: This policy is usually issued immediately, with no waiting period required. This insurance is optimal for persons in good health who want to enroll as soon as possible.

  • Graded Benefits: This policy comes with a two-year waiting period. It is for individuals with mild to moderate health problems. Upon the death of a policyholder, the beneficiary gets a portion of the death benefit. If you die within the first year, your loved ones get 30%-40% of your estate, which increases to 70%-80% the second year. After 2 years are up, the insured is covered for the full face value of the policy

  • Guaranteed issue: A two-year wait period is required for guaranteed issue final expense insurance policy. This policy is popular among persons who have been turned down for other forms of insurance due to their poor health.

Term life policy can be split into three forms:

  • Level Term: Level term means the premiums stay the same for the time of the contract. For example, if you buy a 5 years level term, your payments stay the same for all five years.

  • Annually renewable: This form permits policyholders to renew the term every year without having to prove insurability upon renewal, but your premiums will increase every year.

  • Decreasing Term: Your need for coverage can decrease over time, so you can own a policy that has a decreasing term. In this type of policy, as your coverage is lowered, your premiums can also drop. This kind of a drop in the need happens when you have a level term policy, for say 30 years, to cover your mortgage or business needs. Your need for coverage decreases, as you pay off the debts. As the coverage decreases, so do the premiums. Make sure to discuss your options with an experienced and state-licensed life insurance professional.

It is fairly easy to sign up for a final expense insurance coverage. There are no physical examinations; only medical questions are asked. While the applicant's health remains a factor in determining insurability for standard final expense insurance, final expense insurance provides an alternative for people in seriously declining health. In such an instance, an individual may get a guaranteed issue insurance policy and receive a death benefit in a short period of time.

To assess insurability for term life insurance, an individual's health state is carefully reviewed. Monthly premium prices are influenced by various factors, including the policyholder's age, gender, health, state restrictions.

Term Life vs. Whole Life (Cash value life, Permanent life insurance)

If you have never explored or acquired life insurance before, the process might be daunting. This is particularly true when comparing term life insurance to whole life insurance. However, while both kinds of plans provide benefits after you die, they are somewhat different. Understanding these distinctions is critical for selecting the right life insurance coverage for you and your family. Understanding the pros and cons of each will enable you to make an educated decision and safeguard what matters most. Whole life is a dividend-based insurance policy.

Occasionally referred to as permanent insurance, a whole life insurance policy offers coverage for the remainder of your life if you keep making the required payments. This sort of insurance might accrue cash value as you pay your premiums. Depending on the provider, you may either take a policy loan or use the cash value against the insurance's premium. Policy loans that remain due will be deducted from the death benefit.

When you die, whole life policies pay death benefits to the principal (Named beneficiary). Unlike term insurance, whole life policies protect you for the whole of your life. The coverage remains in effect as long as the premiums are paid, up to the age of 125 years.

The whole life cost of insurance is not illustrated in a policy so the cost of insurance in older age is not guaranteed. You may choose an option to buy an increasing death benefit from your dividends, which is called paid-up additions. Paid up additions increase the death benefit without any further medical underwriting needs. This feature helps as the insured grows older and health conditions can change and insurability becomes questionable.

Whole life is dividend based. Though you are paying a level premium, and if you have an increasing death benefit, at some point you may have to pay more premiums due to lack of dividends.

If you have questions about life insurance in Texas, seek advice only from experienced state-licensed insurance professionals.

In making a decision, choose term life if you:

  • You are only interested in life insurance to meet a short-term need. A term life insurance policy can replace your income if you die while still having significant financial commitments, such as child-rearing or mortgage repayment.

  • You want cheap coverage. Term life insurance is an affordable option, particularly for young and healthy persons.

  • Consider purchasing permanent life insurance but are unable to afford it at the moment. Numerous term life insurance plans are convertible to permanent coverage. The conversion deadline varies per policy.

  • Do not want to use life insurance as a vehicle for investment. By purchasing a cheaper term life insurance policy, you may save the money that may have been expended on a whole life insurance policy and invest it elsewhere.

You may choose a whole life policy if you:

  • Can comfortably pay the higher premiums. You want to ensure that you can afford whole life insurance because it is a long-term commitment. Your policy may be terminated if you fail to pay your premiums or due to low dividends and the high cost of insurance, since you may not have enough cash value to carry the policy further.

  • Like to leave money for your heirs. The death benefit on a whole life policy can be used as an inheritance since it is paid out regardless of when you pass away. If you name beneficiaries on your life insurance policy, the money will be paid to them directly rather than through your estate.

  • Have a long-term dependent, such as a disabled child. Life insurance can be used to set up a trust for your child's care after you pass away. Before establishing a trust, consult a financial advisor and an estate planning attorney.

  • Want life insurance with guaranteed cash value.

Below are some examples of whole life and term life insurance premiums:

Male 10-year Whole Life Insurance ($10,000) vs Term Life Insurance ($250,000)
Age Whole Life Term Life
50 $30 $28.45
55 $35 $42.70
60 $44 $70.95
65 $57 $110.65
70 $75 $185.05
75 $100 $358.12
Female 10-year Whole Life Insurance ($10,000) vs Term Life Insurance ($250,000)
Age Whole Life Term Life
50 $25 $23.37
55 $28 $34.57
60 $34 $57.23
65 $43 $108.95
70 $54 $183.05
75 $74 $356.79

Most term life insurance plans may be converted to whole life insurance policies. When you convert from a term life policy to a whole life insurance policy, you begin to accumulate tax-deferred cash value. Some companies may give you a conversion credit of one year of term premium paid.You may borrow against the accumulated cash value, withdraw the cash value, or take out all the cash value if you choose to surrender the policy. This may create a taxable event and cost you surrender charges.

If you borrow against your policy's cash value, it could be tax-free, depending on how it is set up. If you choose to surrender the policy, you may end up paying taxes on the received surrender value.

You may convert your policy if your circumstances change or if you retire. For example, you may have a long-term dependent, such as a disabled child, or maybe you have always desired whole life insurance but opted for a term due to the lower costs. However, you have changed jobs or have been promoted with higher pay and can now afford increased premiums.

Term Life vs. IUL

Indexed Universal Life (IUL) insurance is a type of life insurance policy that can make you money while posing a modest risk. IUL insurance is often marketed as a cash value insurance policy that allows you to profit from the market gains tax-free while avoiding the danger of losing money during a market collapse. You have lifetime coverage when you buy an IUL insurance policy as long as you pay your premiums. Your policy's death benefit is paid out to your specified beneficiary or beneficiaries when you die. However, since the insurance has a cash value component, it may rise in value over time and depending on the option chosen you could have a significant increase in death benefit.

Interest is earned on the cash value part of your insurance as a fixed-rate or indexing on your cash-value account, depending on the performance of an underlying stock market index. Returns might, for example, be tied to the Standard & Poor's (S&P) 500 composite price index, which measures the 500 biggest U.S. firms by market capitalization. The return rate on the cash value component of your insurance fluctuates with the index. A minimum guaranteed rate of return may be offered by the insurance company that provides the IUL policy. Returns may also be subject to a ceiling or rate limitation.

Typically, you get the following benefits from the Indexed Universal Life Insurance:

TAX Free income is one of the best features of the IUL policies.

  • High Return Potential: An IUL policy leverages call options to gain upside exposure to equity indexes without the risk of losses. Although the annual return possible with an IUL policy depends on how well its underlying index performs, your insurance company is typically still able to offer a guarantee.

  • Greater Flexibility: IUL insurance offers more flexibility in customizing a policy to fit your financial objectives. Policyholders may determine how much risk they want to take in the market, alter the death benefit amount as required, and customize the policy with various riders. For instance, you may opt to add a long-term care rider to your policy to cover the expense of nursing home care if it becomes necessary.

  • Tax-Free income: Policyholders are not taxed for increase in cash value over time unless they surrender the policy before it matures, but other forms of financial accounts may be taxed as ordinary income or capital gains upon withdrawal. This advantage also applies to any loans taken against the policy's cash value. Having a readily available source of cash against which you may borrow may be desirable if you want to avoid paying penalties and taxes on an early withdrawal from a 401(k) or IRA.

  • No Social Security Impact: Social Security payments may be a significant source of retirement income. You may begin collecting Social Security payments as early as age 62 or delay them until you reach the age of 70. Taking benefits before getting to full retirement age and working while collecting benefits might reduce your benefit amount. Prior to attaining full retirement age, you are only permitted to earn a certain amount every year before your benefits are decreased by social security benefits.

The cash value buildup on an IUL insurance policy and borrowed loan amounts will not count against the earnings requirements. Hence, you might borrow against your insurance to supplement your Social Security income without affecting the amount of your payout.

  • Death Benefit: As with other forms of life insurance, IUL coverage can provide a death benefit to your beneficiaries. The amount may be used to cover funeral and burial expenses, repay outstanding obligations such as a mortgage or co-signed student loans, pay for children's education bills, or meet regular living expenses. This death benefit may be transferred tax-free to your beneficiaries.

There are certain disadvantages to IUL insurance plans. Here reasons why you may reconsider signing up on an IUL insurance policy:

  • Caps (Ceiling and Floor): The maximum possible rate you can earn is capped (Ceiling) - which may not provide as much return on investment, as you can achieve without a cap. In return, the IUL (Floor) cap protects the bottom line, where you cannot lose your principal cash value.

  • No Guarantees: IUL plans provide index-linked returns and you may choose the fixed index bucket to not have any up or downswings of the market. Premiums do not increase as the cost of insurance is set in the policy from the issue date.

  • Fees: IUL, just like any other insurance policies, has the below listed cost:

    Premium expense charges

    Administrative expenses


    Fees and commissions

    Surrender charge

All of these fees and other charges can reduce the rate of return on your policy, just like in any other life insurance policy.

In comparison to IUL, term life insurance is a more straightforward and economical solution to safeguard your loved ones financially, if you die while the policy is valid. Unlike IUL insurance, which stays active as long as premiums are paid or you have enough cash value to keep the policy alive, term life insurance is only valid for a particular period of time, often 10, 15, 20, or 30 years. If you pass away while the insurance policy is still valid, your heirs may receive the death benefit, and there are no interest charges or premium increases to contend with.