Term Life Insurance - Payout Likelihood and Cost Difference

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.