Life Insurance - Term or Permanent?

Life Insurance - Term or Permanent?

When it comes time to purchase life insurance you will be  faced with the question, “term or permanent?”  You have probably heard the phrase “buy term and invest the rest”, but, that may not be the end all be all solution for you.  Let’s take a look at the difference between term and permanent insurance to distinguish which type, or combination is best for you.

Term Insurance:

Term insurance is most suitable for individuals who are looking to put insurance in place or a short period of time.  I typically recommend using term insurance to protect your loved ones from any outstanding debt, such as a mortgage, to ensure a spouse has the income they need to cover fixed expenses, and to cover the costs of children while they are in the house.  Term insurance will protect your family during your income earning years.

Pros: 

• Cheap, Cheap, Cheap!  Term insurance is the least expensive option when it comes to life insurance coverage.

• Great for short term coverage needs like paying off a mortgage or protecting family

• Your monthly premiums are locked in for the term specified and cannot increase

Cons:

• Once the term (number of years specified in the contract) has passed, you are no longer insured.  In some cases you can renew your term for another period, but you will pay a premium based on your age at the time of renewal.

• There is no option for cash accumulation.

Universal Life/Whole Life:

This insurance is most suitable for individuals looking to guarantee a benefit to a beneficiary at an undetermined date in the future.  I recommend using this insurance to protect a spouse in retirement, leave a legacy to your beneficiaries, and to cover potential estate taxes. 

Pros:

• The policy is guaranteed to last until you reach age 120!  (guaranteed age varies based on contract)

• The premium you agree to at the age of issue is locked in for the entire contract

• Non-cancellable!  No matter what changes in health you have over time, the policy cannot be cancelled. (unless you fail to pay your premiums)

• A cash value component is accumulating within the policy.  In most cases, this will allow you to miss payments or stop paying at a future date.  You may even have the options to withdraw these cash values if you need them. (before skipping a payment, check with the carrier to ensure you have the funds to cover the paymets)  

Cons:

•   More expensive than term insurance

• While the cash value component is a part of the contract, it grows at a fixed rate. (typically between 3-6%)
  

Typically, a combination of these two types of insurance is the solution.  Since the need for insurance is more imperative during our working years, a large portion of the total insurance plan can be covered by term insurance lowering the cost.  As we grow older, and begin to accumulate assets, this need decreases, but often does not disappear completely.  For the residual need, the permanent insurance is the way to go.

If you need assistance reviewing your insurance needs, please give Guide My Finances a call.  We are happy to help!