subject: Is The Payout For Term Life Insurance The Same As For Permanent Life Insurance? [print this page] People often purchase a term life insurance policy because the premiums are considerably lower than those that they would have to pay for a permanent life insurance policy.
"Term insurance" is actually the most affordable way to purchase substantial death benefits, but some people wonder if the insurance companies use a different method to calculate the cost of insurance for term instead of permanent assurance? In other words, do they use different mortality tables for calculating the costs?
Do the Insurance Companies Use Different Mortality Tables for Term Insurance?
Insurers actually use exactly the same mortality tables to calculate the cost of insurance as well as the death benefits. As long as the premiums for either type of policy are current and the policy is in force when the policy holder passes away, all the death benefits are income tax free.
Why Term Life Insurance Policies Cost So Much Less than Whole Life Policies
A term life insurance policy provides coverage for a limited period of time. Often the term of coverage is for 10, 15, 20, or 30 years. The premiums paid for any of these terms will remain the same for the duration of the coverage.
The actual cost is based on the total cost of every year's annual renewable term rates with an adjustment made for the time value of money. Therefore, the longer the term of the policy, the higher the premium is because as people get older it is more expensive to insure them. All of this is averaged into the cost of the premium.
However, a term insurance program could very well expire without the insurance company having to pay out any claims. That's primarily why they are so much lower in cost.
Studies done by the insurance industry show that this is a very attractive program for them to offer because there is a very low probability that death benefit claims are made for term insurance policies. One study showed that the probability of an insurance company paying a benefit is as low as one percent.
However, because permanent life insurance programs last for "a lifetime", at some point in time the insurance company will absolutely have to pay out death benefits.
One of the features of a permanent life insurance policy is that it has a built in cash accumulation vehicle. In essence, cash accumulation forces the insured to self-insure. This feature itself makes this type of insurance program substantially more expensive than any term life insurance program that offers the equivalent coverage at the same point in time in the insured's life.
by: Wendy Moyer
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