Two main types of life insurance with different benefits and features

The two primary types of life insurance coverage are term life insurance and permanent life insurance. Term life insurance is a more cost-efficient way to get a given dollar amount of protection. However, a term life policy (and its payout) only lasts for a limited time – typically 10 to 30 years – and does not build cash value. Once the policy's term runs out, there's no protection and no value left.

Permanent life insurance, on the other hand, lasts your entire life as long as premiums are kept up.1 These policies also provide other benefits, including cash value that can be used while you are still alive.2 The two most popular types of permanent policies are whole life insurance and universal life insurance. Both provide lifelong insurance coverage and build cash value. However, the policies differ regarding flexibility, guarantees, and how life insurance companies calculate cash value growth.3

What are the living benefits of a term life policy?

 One of the main reasons term life insurance costs less than permanent insurance is that you are only paying for the death benefit – i.e., the lump sum of money paid to your beneficiaries if you die while the policy is in force. Some term life policies do have living benefits; however, that come in the form of riders. An insurance rider is an addition to your policy that adds a benefit, usually at an extra cost.4 Some common types of living benefit riders for term life insurance include:

Terminal illness rider

Also called accelerated death benefits, this rider can help provide funds if you receive a terminal diagnosis that shortens your life expectancy to two years or less, depending on the policy. This rider can help cover end-of-life care and related expenses, but the benefit can also be used for things beyond that. For example, if you're healthy enough to travel, it can be used to take a vacation to a place you've always wanted to go. Many insurers add this rider automatically, but there may be a waiting period: the policy must be in force for a specified amount of time before you can access the benefit. Also, any amount that is advanced will be deducted from the benefit amount paid to your beneficiaries.

Critical illness rider

This can provide funds to help pay medical expenses for certain qualifying illnesses that have high medical costs and shortened life expectancy – such as a stroke, heart attack, or kidney failure – that aren’t necessarily considered terminal. As with a terminal illness rider, this money is deducted from the benefit paid out after you die.

Chronic illness rider

This is like a critical illness rider but applies if you are diagnosed with a chronic illness that prevents you from being able to complete at least two of six determined "activities of daily living" (ADLs). These ADLs include eating, bathing, using the bathroom, getting dressed, transferring, and continence. Again, any money advanced is deducted from your death benefit.

Return of premium rider

This is actually a distinct kind of term policy that returns the premiums paid into your policy at the end of the term (assuming you don’t pass away, in which case the death benefit is paid out instead). This type of term life policy can be significantly more expensive than the typical term policy.

Disability waiver of premium

This rider allows you to stop paying your premiums while keeping the policy in force if you suffer a disability (a covered injury or illness that keeps you from earning income).5

What are the living benefits of permanent life insurance?

 A permanent life policy will typically offer most of the optional riders noted above, but it also has an important feature that term life does not provide: cash value. So while permanent insurance is typically more expensive than term, most of the cost difference is because premium dollars can contribute to a policy’s cash account, where it grows tax-deferred, helping your family build wealth.

Cash value usually takes a few years to grow into a usable sum, but once that happens, it can become a financial asset with many advantages. Generally speaking, there are four ways to access life insurance cash value:

  1. Surrender: Cashing out your policy is usually not advisable, but it is possible. While you can cancel your policy and take the cash surrender value payment, you'll no longer have life insurance protection, and you may face significant surrender fees and/or taxes – but there are other ways to access those funds.
  2. Withdrawal: In many situations, you can withdraw cash from your permanent life policy. That money is often non-taxable as long as it's not more than the amount you've paid into the policy. However, the policy's death benefit will likely be reduced, and that reduction may be more significant than the amount withdrawn, depending on the terms of your policy.
  3. Loans You can use your policy cash value to secure a loan that grows at a fixed or variable loan rate set in the contract. Rates can be competitive or lower than a personal loan and there is no application or credit check. You can even choose not to repay, but the outstanding loan balance will usually be deducted from your death benefit.
  4. Pay your life insurance premium. Want to stop paying premiums after you retire? You can often use the money in your cash account to pay part or all of your premiums, making it much easier to keep your cash value insurance coverage in place.

What kind of living benefits do you want from a life insurance policy?

Your life insurance needs are unique to you. If you've decided it's time to get life insurance protection – or add to your existing coverage – that's an essential first step. But if you aren't sure which living benefits best suit your needs, it’s time to take the next step. Talk about your situation and goals with a financial professional, preferably one who has helped others get term and permanent coverage. If you need help finding such a person, Guardian can connect you to a financial representative who can help. One last bit of guidance: Don’t put things off because you’re not sure what kind of policy to get, because your life insurance costs will generally go up with age.

Frequently asked questions about life insurance benefits

What are examples of living benefits?

For term life policies, these benefits generally come in the form of insurance riders that are available for an added fee. Most of these riders allow the insured to tap into the policy’s death benefit in situations where funds are needed for health reasons, such as becoming chronically or terminally ill. Permanent life insurance policies also offer a wealth-building living benefit: tax-advantaged cash value that can be used in a variety of ways while you are still alive, and even help fund your retirement.

What type of life insurance has living benefits?

Both permanent and term life insurance have riders, i.e., optional benefits that can be added, allowing you to access benefits while you are still alive, but only in limited situations. However, permanent insurance also provides cash value that can help build family wealth with tax advantages.

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This article is for informational purposes only. Guardian may not offer all products discussed. Please consult with a financial professional to understand what life insurance products are available for sale.

1 All whole life insurance policy guarantees are subject to the timely payment of all required premiums and the claims paying ability of the issuing insurance company. Policy loans and withdrawals affect the guarantees by reducing the policy’s death benefit and cash values.

2 Some whole life polices do not have cash values in the first two years of the policy and don’t pay a dividend until the policy’s third year. Talk to your financial representative and refer to your individual whole life policy illustration for more information.

Policy benefits are reduced by any outstanding loan or loan interest and/or withdrawals. Dividends, if any, are affected by policy loans and loan interest. Withdrawals above the cost basis may result in taxable ordinary income. If the policy lapses, or is surrendered, any outstanding loans considered gain in the policy may be subject to ordinary income taxes. If the policy is a Modified Endowment Contract (MEC), loans are treated like withdrawals, but as gain first, subject to ordinary income taxes. If the policy owner is under 59 ½, any taxable withdrawal may also be subject to a 10% federal tax penalty.

3 Permanent life insurance consists of two types: whole life and universal life. Cash value grows in a participating whole life policy through dividends, which are declared annually by the company's board of directors and are not guaranteed. Cash value grows in a universal life policy through credited interest and decreased insurance costs. The cash value of both policy types benefits when the policyholder pays an amount above the required premium.

4 Riders may incur an additional cost or premium. Riders may not be available in all states.

5 A Waiver of Premium rider waives the obligation for the policyholder to pay further premiums should he or she become totally disabled continuously for at least six months. This rider will incur an additional cost. See policy contract for additional details and requirements.

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