Payout Likelihood and Cost Difference
Both term insurance and permanent insurance use the same mortality tables for calculating the cost of insurance. A death benefit which is income tax free. However, the premium costs for term insurance are substantially lower than those for permanent insurance.
The reason the costs are substantially lower is that term programs may expire without paying out, while permanent programs must always pay out eventually. To address this, some permanent programs have built in cash accumulation vehicles to force the insured to "self-insure", making the programs many times more expensive.
Other permanent life insurance policies do not have built in cash values. The policy owner may have the option of paying additional premium in the early years of the policy to create a tax deferred cash value. If the insured dies and the policy has a cash value, the cash value is often paid out tax free in addition to the policy face amount.
Insurance industry studies indicate that the probability of filing a death benefit claim under a term insurance policy is low. One study placed the percentage as low as 1% of policies paying a benefit. The low payout likelihood allows term insurance to be relatively inexpensive. Because of the low likelihood of an insurer having to pay a death benefit, term insurance may offer more coverage per premium dollar - by a factor of up to 10.
Read more about this topic: Term Life Insurance
Famous quotes containing the words likelihood, cost and/or difference:
“Sustained unemployment not only denies parents the opportunity to meet the food, clothing, and shelter needs of their children but also denies them the sense of adequacy, belonging, and worth which being able to do so provides. This increases the likelihood of family problems and decreases the chances of many children to be adequately prepared for school.”
—James P. Comer (20th century)
“Greeting people doesn’t cost you anything except a roll of your tongue.”
—Chinese proverb.
“I parted from my beloved because there was one thing which I had to tell her. She questioned me. She should have known all by sympathy. That I had to tell her it was the difference between us,—the misunderstanding.”
—Henry David Thoreau (1817–1862)