Term or Cash Value Policies

Life insurance policies can be divided into two main categories, term insurance and cash value insurance. A brief discussion of each, and their relative advantages and disadvantages, follows.

Term insurance. Term insurance provides a death benefit only you die with the specified term, the insurance company pays; you don't die within the term, they don't pay. Such a policy is pure protection only; it has no investment (cash value) component to it. Although it's called "term" insurance because the coverage runs for a specified term (such as a year), many modern term policies may be renewed at the option of the insured for as long as he or she is willing to pay the premiums.

While the simplest form of term must be renewed annually, term policies are now written for much longer terms (5, 10, or 15 years). Although the cost of term insurance usually rises as the insured gets older, level-term policies are also available. These policies keep the premium at the same dollar amount throughout the term (although the premium would jump more sharply for the next term than would be the case for the year-to-year rise for an annual term policy).

Cash value insurance. There sometimes appears to be a nearly unlimited number of types of cash value policies. While they all have important differences, they all boil down to this: They provide a death benefit (term protection) and they provide for a savings feature. Cash value insurance is much more expensive than term (particularly at younger ages), but typically provides insurance throughout lifetime at a level premium. A policyholder normally can receive the benefit of these cash values during lifetime in one of two ways: (1) by taking a loan against them, or (2) by cashing in the policy (the policy will no longer be in force, but the policyholder will receive the cash surrender value).