Which of the following is a drawback to permanent life insurance?
A. Generally higher premiums than term insurance’s
B. Must be renewed periodically
C. Ability to access cash value
O D. Paid out if you die
The Correct Answer and Explanation is :
The correct answer is A. Generally higher premiums than term insurance’s.
Explanation:
Permanent life insurance, such as whole life or universal life insurance, is designed to provide lifelong coverage, as opposed to term insurance, which only covers a specified period (typically ranging from one to thirty years). One of the primary drawbacks of permanent life insurance is its higher premium costs compared to term insurance.
- Cost Considerations: The higher premiums associated with permanent life insurance are due to several factors. First, part of the premium contributes to the policy’s cash value component, which grows over time and can be accessed by the policyholder. Second, since permanent policies provide coverage for the insured’s entire life, the insurance company must account for the possibility of paying out a death benefit at any time, which requires a higher upfront cost.
- Cash Value Accumulation: While permanent life insurance does allow policyholders to access cash value, this feature can also be a double-edged sword. The cash value grows slowly in the early years of the policy, and if a policyholder withdraws or loans against it, they may reduce the death benefit or incur interest charges, further complicating their financial planning.
- Comparative Value: Although term insurance may provide lower initial premiums, it lacks the cash value accumulation and lifelong coverage features of permanent policies. However, for many individuals, particularly those with short-term insurance needs (e.g., families with young children), term insurance offers a more affordable option.
- Long-Term Commitment: Additionally, the commitment to higher premiums can be a financial burden for some. If policyholders experience changes in their financial situation, they may struggle to maintain their permanent policy, leading to potential lapses or loss of benefits.
In conclusion, while permanent life insurance offers benefits such as lifelong coverage and cash value accumulation, the generally higher premiums are a significant drawback, making it less accessible for some consumers compared to term life insurance.