While there are many decisions you will have to make when assessing your life insurance needs, one of the most basic is whether you need permanent insurance or term insurance.

A simple way to understand the differences between these two types of life insurance is by comparing them to something familiar to all of us — finding a place to live.

Tailoring life insurance to fit your needs is like finding a place to live. Once you find the right home, you need to choose how to pay for it.

Buying permanent life insurance is like owning a home, while buying term insurance is like renting one.

There are advantages and disadvantages to both . . .

Permanent Life Insurance

Like owning property, owning permanent life insurance is usually an appropriate way for people to help meet long-term needs. Over time, it may be the least expensive form of life insurance since premiums are fixed and it builds value. Plus, this cash value accumulates on a tax-deferred basis.
Types of permanent insurance can be likened to types of mortgages. Whole Life requires a higher payment, but has the most guarantees. Other permanent products require less premium, but contain a degree of uncertainty.

Term Life Insurance

What is it?

Term insurance is generally the least expensive and least complicated type of life insurance. It provides insurance protection at a low cost for a specified period of time, such as 1, 10 or 20 years. If you die within the term period, a death benefit is paid to your beneficiary. If you are still living at the end of the term, protection ceases unless the policy is renewed. There is no "accumulation" element, or cash value with term insurance.

Who's it for?

• People with a temporary need for life insurance protection.
• Those who need a large amount of insurance protection but have limited budgets.
• People with specific business needs (e.g., business owners who want to cover the life of a key employee who has a set number of years until retirement).

Benefits:

• It provides insurance protection for a low cost (at least initially).
• If your needs change, most policies allow you to convert your term policy for a permanent life insurance policy without having to take a medical exam or provide other information about your health.
• Term insurance is a good way to supplement other coverage when you have added financial responsibilities for a given period of time (e.g., mortgage, college expenses).
• Death benefits are generally received free from income tax.

Some drawbacks to consider:

• Premiums generally increase with age and they could become unaffordable later in life.
• There is no cash value element, so you miss the tax-deferred cash value of permanent life insurance policies, such as Whole Life.
• Once the term period expires, the insurance coverage ceases and the policy has no further value

Term vs. Permanent Life Insurance

What is it?

Permanent life insurance is distinguished from term insurance in several ways.

While term insurance provides protection only for a specific period of time, permanent insurance can provide protection for your entire lifetime, or in certain instances, up to a specific age -- at which point the issuer will pay the policy owner the cash value.

In addition, permanent life insurance policies can build a cash value -- money that you can borrow against and, in some instances, withdraw to help meet future goals, such as paying for a child's college education. Note: You will usually have to wait for a period of time after the purchase of your policy for sufficient cash value to accumulate for you to borrow against. If the unpaid interest on your loan plus your outstanding loan balance exceeds the amount of your policy's cash value, your policy and all coverage will terminate.

Permanent life insurance policies enjoy favorable tax treatment under current rules. Cash value growth is generally on a tax-deferred basis, meaning that you pay no taxes on any earnings in the policy so long as the policy remains in force. Provided you adhere to certain premium limits (so that your policy is not classified as a Modified Endowment Contract), money can be taken out of the policy without having to pay taxes, since policy loans generally are not considered taxable income, and withdrawals generally can be taken up to the amount of premiums paid without being taxed. Withdrawals will reduce the death benefit.

The two general types of permanent life insurance policies are Whole Life, a dividend-paying policy*, and Universal Life, a flexible policy.
*Dividends are not guaranteed.

Who's it for?

People who...

• Know their need for life insurance is long term.
• Want to accumulate a cash value to provide funds for education, retirement or other future goals.
• Want to take advantage of the tax-favored treatment of cash value life insurance policies.

Benefits:

• Over time, permanent insurance may be more economical than term insurance since premiums do not increase with age and the policy can build a cash value.
• Earnings, and certain withdrawals and loans, may qualify for tax-favored treatment.
• Policy loans and withdrawals provide access to your cash value.
• If you cancel the policy, the accumulated cash value is yours to use as you wish. Surrender charges and taxes may apply.

Some drawbacks to consider:

• Permanent insurance is initially more expensive than term insurance.
• Unlike term insurance, permanent insurance offers no conversion option — the ability to exchange it for another type of plan later. Make sure the policy you buy is the one you really want.
• Loans, withdrawals, and any unpaid loan interest generally reduce the death benefit, which could leave beneficiaries inadequately protected

Contact Gino P. Molettieri today at 781-942-5000 x144

Life Insurance Glossary

Beneficiary
The person(s) named in the policy to receive the life insurance proceeds upon the death of the insured.

Cash (Surrender) Value
The amount that is available in cash for loans and that may be available for withdrawals. Accessing Cash Surrender Value may reduce the death benefit and may increase the risk of lapse.

Convertible Term Insurance
Term insurance that can be exchanged (converted), at the option of the policyowner and without evidence of insurability, for a permanent insurance policy.

Dividend
A return of part of the premium on participating insurance that is based on the insurer's investment, mortality, and expense experience. Dividends are not guaranteed.

Face Amount
The amount stated on the face of the policy that will be paid in case of death. It does not include additional amounts payable under accidental death or other special provisions, or acquired through the application of policy dividends.

Insurability
Acceptability to the company of an applicant for insurance.

Insured or Insured Life
The person on whose life the policy is issued.

Level Premium (Life Insurance)
Life insurance for which the premium remains the same from year to year. The premium is normally more than the actual cost of protection during the earlier years of the policy and less than the actual cost in the later years. The building of a reserve is a natural result of level premiums. The payments in the early years, together with the interest that is to be earned, serves to balance out the underpayment of the later years.

Loan (Policy Loan)
A loan made by a life insurance company from its general funds to a policyowner on the security of the cash value of a policy. Generally, loans may reduce the policy's death benefit and cash value.

Paid-up Insurance
Insurance that will remain in force with no need to pay additional premiums.

Participating Policy
A life insurance policy that is eligible for the payment of dividends by the insurer (see also Dividend.)

Permanent (Life Insurance)
Any form of life insurance except term; generally insurance that builds up a cash value, such as whole life.

Policy Owner
The person who owns a life insurance policy. This is usually the insured person, but it may also be a relative of the insured, a partnership or a corporation.

Premiums
Payments to the insurance company to buy a policy and to keep it in force.

Renewable Term Insurance
Term insurance that can be renewed at the end of the term, at the option of the policy owner and without evidence of insurability, for a limited number of successive terms. The rates generally increase at each renewal as the age of the insured increases.

Term Insurance
Life insurance that does not build up cash value and where the premium normally increases as the insured gets older.

Universal Life Insurance
A flexible premium life insurance policy under which the policyowner may change the death benefit from time to time (with satisfactory evidence of insurability for increases) and vary the amount or timing of premium payments. Premiums (less expense charges) are credited to a policy account from which mortality charges are deducted and to which interest is credited at rates that may change from time to time.

Whole Life Insurance
A basic type of permanent life insurance that can provide lifetime protection at a level premium. Premiums must generally be paid for as long as the policy is in force.

Contact Gino P. Molettieri today at 781-942-5000 x144

Please note that Investment and Insurance Products are: not FDIC insured, not bank guaranteed, may lose value, and not insured by any Federal Government Agency.

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