Term vs Permanent Life Insurance: Weighing Your Options
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UPDATED: Aug 13, 2020
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If you are considering purchasing life insurance, then you need to be able to compare the two main types of policies: term and permanent. There are significant differences between term life insurance and permanent, and which one you choose depends on your needs, stage in life, age and budget. Ultimately, term vs. permanent life insurance is a decision that you and your family should make together based on your budget and life insurance goals.
TIP: To fully understand these differences and how they fit into your life, contact a reputable life insurance agent to guide you in your decision. Keep in mind that it is possible that having both could benefit your life insurance portfolio when you talk to an agent.
The Difference Between Term and Whole Life Insurance
Term Life is an insurance policy that is good for a specific term or period. You can purchase 5, 10, 20, 30 term life insurance plans depending on your life insurance needs. After the term has expired, the insurance goes away. When you purchase a term life plan, set your term in accordance with your needs during that time. If you have very young children, then you will want a longer term to protect them until they are old enough to be on their own. If those who rely on you for support will only do so for a short time, then a shorter term will suffice.
Term life insurance will only provide a death benefit, and does not accrue cash value or act as an investment account. As a result, you will not be able to borrow against a term life insurance policy, but your premium rates will be significantly lower than a permanent plan. Term life insurance is designed to be cheap and flexible by focusing on death benefits that you need to protect your loved ones during a specific period.
TIP: When your term life plan expires, you will need to buy more coverage or renew your policy. Due to the change in your age / life circumstances, your rates will be different than before. Despite this, term life insurance rates are typically still cheaper than permanent rates unless you are elderly or have serious health concerns.
Permanent Life Insurance is insurance for the rest of your life at the same premium rate. If you take this policy out at age 20, your premium will be the same at age 70 regardless of your health concerns. Permanent life insurance also dedicates some of your premium payments to some sort of savings or investment account to accrue cash value. This savings can be borrowed against in a time of need or that growth can be directed to purchase additional insurance as your insurance needs change. There are several varieties of permanent life insurance that you will need to look into before you make a decision such as whole life insurance, universal life insurance, and variable life insurance. Each type offers a unique insurance / investment package that may be right for you. Because permanent life insurance has an investment or cash savings component, it will be more expensive than term life.
Things to Consider: Permanent Life Insurance vs. Term
There are some things to consider when deciding which policy would be best for your needs.
- Your budget is the major factor. It would be a waste to take out a policy to find out that you cannot afford the premium payments in years to come, causing it to lapse and you to loose coverage. Term life insurance offers some of the most reasonable rates because it only focuses on the death benefits.
- What you need out of life insurance: Permanent life insurance can have many uses. It can be a financial planning tool, an estate planning tool, a savings account, and a source of money should you need a policy loan in the future. The cash value of a permanent life insurance account can come in very handy on a rainy day when you need to take out a policy loan. Of course, you will have to pay for these services with higher premium rates, and repay any loan you take out of your policy.
- What you do with the premium difference: Permanent insurance may have additional benefits in terms of financial planning, but you may be better served by building your money using an investment account separate from your life insurance. If you purchase term life insurance, you will save money on life insurance. You can then invest that difference in a separate investment or savings account with a potentially higher return than your permanent life insurance account. This option not only gives you the life insurance coverage you need, but allows you to accumulate your own nest egg that may grow at a better rate.
- Your age: If you are young (say 20 years old), buying a 30 year term would put you at 50 years of age when your life insurance ends. At the age of 20, perhaps you do not have a home, children or other major responsibilities. Therefore, perhaps a whole life policy may be advisable. The premiums would be low and you would have this coverage for life as long as you paid the premiums. It would accrue cash value and you could borrow against it in your later years if emergency cash needs arise. Then as your responsibilities increase and the need for life insurance also increases, adding term life insurance as needed is still an option.
- Your responsibilities: If you have children or a mortgage that would require continued support after your death if you were to die in the next 20 to 30 years, then your life insurance should cover at least that period. In this case, your primary concern would be how the life insurance death benefit will take care of your responsibilities as a parent or a homeowner rather than any financial growth or accumulation.
You need to evaluate all of the circumstances of your life, what life insurance can do for you, and what your budget restrictions are before you purchase a life insurance plan. Keep in mind that you can combine both types of life insurance in varying amounts to build the best portfolio for you. Do not be afraid of asking a life insurance agent for advice! Managing your life insurance needs can be challenging. Maintaining a good relationship with a reputable agent can take some of the guess work out of managing your life insurance needs, and help you build the best life insurance portfolio for your needs.
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