Why Do You Need Permanent Life Insurance?

The premiums of term life are low and are calculated to be sufficient to cover only mortality costs and expenses for the period insured. The death benefit is payable only if the death of the insured occurs during the policy term and while the policy is in force. The net premium for the term policy is determined by the death rate for the attained age of the individual involved. Subject to minor exceptions, death rates increase with age, so the term insurance policy's net premium needed to pay death claims increase at the start of each new term. Moreover, because death rates rise at an increasing rate as ages increase, the net premium also rises at an increasing rate, much like a flight of stairs with successively higher rises.

At older ages, the premium rates for term insurance are extremely high. However, many individuals need coverage that extends throughout their lifetime. This need led to the development of Permanent Life Insurance or Cash Value Insurance. A permanent Life policy provides permanent protection and involves a reserve or savings component, which is referred to as cash value insurance. With permanent life insurance or cash value life insurance, premiums are sufficient not only to pay the insurer's mortality costs (death claims) and expenses but also to build a cash value (or saving funds) within the policy owners.

Life Insurance is a valued contract. When an insured person dies, the beneficiaries of his or her life policy receive the face amount of the policy or some other benefit that depends on provisions within the insurance contract. There are basically two types of life insurance, term and permanent. The combination of protection and accumulated cash value is characteristic of all permanent life insurance. It provides the only practical arrangement to provide insurance protection for an individual's entire life span, without the possibility that the cost will become prohibitive.

Term Life policy provides temporary protection. The beneficiaries can receive the death benefit only if the insured person dies within a limited period of time, typically ranging from one year to 30-years. These policies expire at the end of a specific period of time, usually with no further value.

In many cash value policies, the annual premium does not increase from year to year but remains level throughout the premium-paying period. As previously mentioned, net premiums tend to rise as a result of increasing death rates. If premiums are leveled out, those paid in the early years of the contract must be more than sufficient to meet current death claims, while those paid in the later years generally will be less than adequate to meet incurred claims. The net premiums beyond those needed for death claims in the early years of the contract create an accumulation that is held in trust by the insurance company for the benefit of, and to the credit of, the policy owners.

The combination of protection and accumulated cash value is characteristic of all permanent life insurance. Fundamentally, one contract differs from another only by the proportions in which they combine the two elements. Nearly all operations of life insurance companies feel the effect of cash value or permanent life insurance plans. The reserve accounts for a major portion of the aggregate assets of these companies. The need to invest funds presents the institution with a challenge but also enables it to materially contribute to economic expansion. The cash value makes a permanent life insurance contract one of the most flexible and valuable contracts in existence, and one of the most acceptable forms of collateral for credit purposes. A cash value or permanent life insurance plan provides the only practical arrangement to provide insurance protection for an individual's entire life span, without the possibility that the cost will become prohibitive.