Once you’ve decided that you need life insurance, you’ll be faced with a number of choices about the type of policy you should get. There are two broad categories: term life insurance vs. permanent life insurance.
Term life insurance provides coverage for a specific amount of time. Generally, you can select the term that works best for you, such as 5, 10, 15, or 20 years. This is usually the cheaper option, but it only pays your beneficiaries if you die while the policy is in force.
While term life insurance only lasts for a fixed number of years, permanent life insurance is designed to provide insurance protection for as long as you live. “Whole Life,” “Universal Life,” and “Variable Life” are all forms of permanent life insurance. A whole life insurance policy is particularly well-suited to those looking for stability and wanting secure guarantees for long-term responsibilities, like funeral expenses and a steady income for the surviving spouse.
Term Life Insurance
If you’re looking for protection at a more affordable price, then term life insurance may be the right choice for you. It is the least expensive type of life insurance, with premiums that can be as low as 1/6 to 1/8 the cost of whole life insurance, so it’s particularly well-suited for young people looking for a policy with low monthly premiums.
Taking out a term life insurance policy is similar to renting a house. You only have coverage during the time you are paying the premiums, and you don’t get any type of equity for the money you are paying. You’re not paying the insurance company to invest and grow your money, and you’re not earning any interest on your cash, as you would under a whole life insurance policy. (Note that some term life insurance policies can be converted to a permanent product, such as whole life, throughout the duration of the term period.)
There are two main types of term life insurance: annual renewable, which starts with a low premium that then increases with age, and level premium, which has a higher, fixed premium.
The downside of term life insurance is that your beneficiary gets nothing if you don’t pass away during the term of the policy. In addition, if your policy expires and you decide to renew, you may have to pay a higher premium if your health has deteriorated.
Reasons To Get Term Life Insurance
When you need life insurance for a specific period of time, term life insurance enables you to match the length of the term policy to the length of the need. For example, if you have young children and want to ensure that there will be funds to pay for their college education, you might buy 20-year term life insurance.
When you need a large amount of life insurance but have a limited budget, term life insurance will give you more affordable coverage. If you are still alive at the end of the term, coverage stops unless you renew your policy.
Permanent Life Insurance
Permanent life insurance policies offer both a death benefit and cash value. The death benefit is the money that’s paid to your beneficiaries when you pass away, while cash value is a separate savings component that you may be able to access while you’re still alive. Permanent life insurance lasts from the time you buy a policy to the time you pass away, as long as you pay the required premiums.
The three basic types of permanent life insurance are whole life, universal life, and variable life insurance.
Whole Life offers three important guarantees: a death benefit, fixed premiums, and the ability to build cash value.
Universal Life offers greater flexibility than whole life policies. Universal life insurance provides permanent protection along with the ability to adjust your protection level, your premiums, and your payment schedule to meet changing needs in your life.
Variable Life balances life insurance protection with the potential to build cash value through a choice of investment options. However, any investment losses can also reduce the policy’s cash value and, subsequently, its death benefit.
When considering what kind of permanent insurance to get, it’s important to focus on what is guaranteed versus what is projected or hypothetical. If your decision is based on hypothetical scenarios that rely on a projected dividend, interest rates, or subaccount performance, you will need to carefully monitor the policy and be prepared to make additional capital contributions, if necessary.
Two of the main advantages of whole life insurance are that you can be covered for your entire life (if you keep the policy long enough) and your minimum cash value is guaranteed. The guarantee means that part of your cash investment is safe, and your policy keeps value in case of a market crash. In addition, the policy’s value will increase every year, and you will most likely also receive annual dividends that are exempt from taxes. Your yearly dividends can be taken as cash, used to pay premiums, or added to your policy to increase its death benefit and cash value.
Another big advantage is that you can borrow against your whole life insurance policy if you suddenly find yourself in a cash crunch or need money for any personal reason. You can borrow these funds even if your credit is shaky. The death benefit is collateral for the loan, and if you die before it’s repaid, the insurance company collects what is due before determining what goes to your beneficiary.
However, keep in mind that premiums for permanent life insurance policies are significantly higher than for term insurance. In fact, the cost for whole life insurance can be six to eight times higher than that of term life insurance. On the plus side, the premium for a permanent policy remains the same no matter how old you are, while term life insurance premiums can go up substantially every time you renew the policy.
Reasons To Get Permanent Life Insurance
In addition to simply helping your loved ones pay the bills after you’re gone, there are several reasons to make permanent life insurance a part of your long-term financial plan.
- To accumulate savings that will grow on a tax-deferred basis and could be a source of borrowed funds for a variety of purposes
- To keep your life insurance active for as long as you live
- To build a source of funding for life’s emergencies and opportunities
- To provide for a loved one with special needs, or a child who is not yet independent
- To assist aging parents or other family members who need your support
- To sustain a business you want to see continue after you’re gone
- To equalize inheritances among beneficiaries
- To create a legacy for grandchildren, future generations, or your favorite charity
If you’re ready to look at your life insurance options, just give us a call! We’d be happy to walk you through the process and get you the right policy at the right price.