Permanent Versus Term Life Insurance
Permanent Life Insurance versus Term Life Insurance. Term life insurance offers a death benefit for a fixed amount of time (mostly between 5 and 30 years). Permanent life insurance covers you for your whole life and accumulates cash value that can be accessed as a living benefit at any time while you are still alive.
Make sure your family can continue to live their lifestyle financially. This blog will compare permanent life insurance to term life insurance.
Who needs life insurance?
If someone counts on your income or depends on you, you should have life insurance to secure a financial legacy. It pays cash to your loved ones if you die.
The most common reasons people buy life insurance are:
- Income replacement
- Leave a financial legacy to Children
- Leave a financial legacy to their spouse
- Mortgage protection
- Own/Start a business
Ask yourself: Will, my loved ones, struggle financially if I weren’t here?
A life insurance death benefit can be used for anything: funeral costs, bills, mortgage, student loans, college, retirement & more.
1. Permanent Life Insurance:
Permanent life insurance covers you for your whole life and accumulates cash value that can be accessed as a living benefit at any time while you are still alive. Permanent policies are typically the best option if you look for life-long protection, accumulation of tax-deferred cash value, or adding long-term care coverage to your policy. A portion of the premium of a permanent policy is used to build up a cash value. The cash value can be used in several ways, including allowing you to take out a loan against the cash value or paying your premium after your policy is fully paid.
Permanent life insurance is designed to last permanently. It should last well into your hundreds.
Most common permanent life insurance policies
- Index universal life insurance is a type of permanent life insurance that has a cash value component in addition to a death benefit. The money in your cash-value account can earn interest based on your chosen stock market index, such as the S&P 500, Nasdaq, etc… the performance of your selected index will dictate your cash value’s rate of return.
- Variable life insurance: this is a life insurance policy in which the payout amounts are determined by the performance of the underlying sub-accounts available in the policy.
- Whole life insurance: guarantees payment of a death benefit to beneficiaries in exchange for premium payments. It has a cash savings component, which the policy owner can draw or borrow from.
Most common reasons why many people purchase permanent life insurance
- Funding a tax-free retirement income
- Attaching a long-term-care rider on the policy to offset the cost of care
- Final expenses: burial costs, funeral costs
Choose Permanent life insurance if you want:
- To build cash value that grows tax-deferred.
- Lifelong coverage.
- Use it while you are still alive (living benefits).
2. Term Life Insurance
Term life insurance offers a death benefit for a fixed amount of time (mostly between 5 and 30 years). When you purchase term life insurance, an insurance company promises to pay your beneficiaries a set amount if you die during the term. In exchange, you pay a monthly premium to the company for that term. Term life insurance is purchased to fill a temporary need. So that might replace your income for a certain amount of time, like ten years, 20 years, or 30 years.
The most common reasons people purchase term life insurance are mortgage protection and income replacement.
For example, you just bought a home and have a 30-year loan. Suppose you do pass away before the home is paid off. A benefit will be paid to your family, and they can pay off the house. Without life insurance, your family might struggle to be able to pay a mortgage because of a loss of an income stream.
Choose Term life insurance if you: need a policy that will give you financial protection for a certain period (e.g., while your children are young). After this period, you will need to extend your policy or covert it. If you don’t do anything, you won’t be covered anymore.
How Much Insurance to Purchase?
This depends on your lifestyle or your future goals. Every family is different. Life is not a one-size-fits-all proposition, and neither is your insurance policy.
The amount you need can be:
- Needs-based: How much would my loved ones need to survive financially?
- Goals-based: How much would my family need to reach their financial (tuition, retirement) goals?
- Legacy-based: What are you hoping to leave behind for your family?
You need the following to calculate the coverage amount you need:
1. The financial obligations you would want to meet if you died: funeral expenses, cover the mortgage or tuition for your children, etc.
2. The financial resources you already have
As a rule of thumb for income replacement, you can use the following:
- 9x income replaces for ten years
- 13x income replaces for 15 years
- 17x income replaces for 20 years
- 23x income replaces for 25 years
- 26x income replaces for 30 years
- 28x income replaces for 40 years
Remember that life insurance policy premiums are significantly lower when you are young and healthy. Most insurance companies increase policies based on people’s age. They do this because people are more likely to develop medical conditions as they age. If you decide to wait with life insurance, you might end up paying more for your policy, and waiting might also result in an additional health exam, which could increase the premium. You can lock in the lower rate if you get it when you are young and healthy.
Review your insurance over time.
Life changes, and so should your life insurance policy. You should review your policy when you get; a new job, a mortgage, are married, divorced, or have children. Otherwise, the wrong person will receive your death benefits.
Click here if you want to review your current life insurance policy.
Our online quoting tool will help you determine the right amount of coverage and which policy to select, all from the comfort of your mobile device. And if you are not confident in making your own decision. One of our licensed agents is ready to support you! You can rest assured that our Policy Engineers will work tirelessly to craft policies tailored to you.