If you’re considering protecting your loved ones, life insurance can be a good financial planning tool. But knowing which type of policy to choose can be daunting. Term insurance and permanent insurance both have their place. To know which type best suits your needs, take a look at some of the differences between coverage and some of the factors that might make you choose one over the other.
Term Insurance As the name implies, term insurance covers you for a specified period of time, usually 10–20 years. The premiums for this type of policy stays the same for the life of the policy. If you don’t die during the term of coverage, no benefits are paid out. If you do, your beneficiaries will be able to submit a claim and receive a payout, according to the rules of your specific policy. Term coverage’s main purpose is to insure your family against the loss of a primary earner during a specific time period.
Permanent Insurance This is permanent life insurance that covers you for life, however long that may be. There are several distinct types of permanent life policies: whole life, universal life, variable life, and variable–universal life. All of these types of insurance provide a guaranteed death benefit payout to your beneficiaries, as long as you keep up payments on your premium and follow the rules and procedures for your chosen policy. Because of these and other expanded benefits, permanent coverage costs more than a term policy. At least, it may seem that way when you’re younger and healthier. One factor to keep in mind: as you get older or experience health problems, the premiums for term coverage can exceed those for a permanent policy you locked in years ago. For this reason, the higher initial premiums of permanent life policies can turn out to be the better deal.
The Other Benefits of Permanent Insurance
While you’ve already read some of the basic ways term and permanent insurance differ—period of coverage, cost, guaranteed payout—there are several other benefits very unique to permanent life insurance.
Investment Savings Most permanent life insurance policies actually have two components, the death benefit component, and a cash savings component. A percentage of the premium can be invested. Eventually, the policy builds up value. The value of these types of policies can be counted as part of the policy owner’s net worth. Term policies do not accrue value and can’t be counted as assets.
Access to the Investment Savings The built-up value of your permanent life policy can be borrowed against—by the policy owner while he or she is still alive. This unique benefit offers tax-free cash to put towards unexpected expenses, such as medical bills, as well as retirement, education, or other large expenses.
Premium Adjustments Another way policyholders can use this accrued value of their policy is to apply it to their premiums. A policy owner who moves from being a high earner to living on a more moderate retirement income might choose to reduce their monthly premium with a little help from the built-up savings in their policy. A word of caution here: know how much value you can draw out of your policy without penalty. If the value dips too low, your coverage could lapse.
Who Needs Permanent Insurance
There are a number of individuals who can benefit from a permanent life policy. While these policies traditionally were used for estate planning or the transfer of wealth, that’s no longer the only application.
Financial Obligations Permanent life can be used by slightly older individuals, who still have a decade or more till retirement, ensure that they will be able to meet their future financial obligations.
Liquidity Individuals who anticipate that their beneficiaries will need to pay estate taxes upon their death may consider a permanent life policy. Permanent policies can provide the liquidity needed to address such tax issues.
Asset Protection Permanent life coverage can also help individuals concerned with protecting their assets. Many states exempt death benefits and cash values of policies from any claims made by creditors.
When to Choose Term Life Insurance
Term life policies are ideal for young professionals and their families. With a clean bill of health at your medical exam, you can ensure your family will be financially protected while your children are young, your spouse goes back to school, your children start college or many other unique circumstances.
The majority of policyholders with life insurance choose term coverage because it meets their needs. The simplicity of term life coverage also makes it easier for consumers to compare policy details. These factors make the market for term life competitive, giving consumers the opportunity to get a good deal.
Taking the Next Step
For whatever type of life insurance you’re considering, it’s always a good idea to consult a professional. As you’ve seen, permanent life policies can be complex. It’s best to handle this important step in your financial planning with the guidance of a trusted insurance professional. Insurance professionals can help you decide what’s most important to have in your coverage and how much protection you need. Combination policies, with term and permanent features, are also something to ask about at your next meeting with your financial planner. Lastly, consulting a professional will help put you at ease, knowing you have precisely the insurance you need, no more, no less.