Life insurance gives you a way to protect your loved ones avoid financial stress surrounding your funeral and help ease the transition to life without you.
When you’re shopping for life insurance, you have options. You can choose between multiple insurance providers. You can pick the amount you want your policy to pay out when you pass away. You’ll also need to make a decision about how long your policy will last, and that usually means choosing either term or permanent life insurance.
When it comes to term vs. permanent life insurance, what’s the difference? Which policy type is best for your situation? Hopefully this will help you understand the basics to both permanent and term life insurance policies.
What Is Term Life Insurance?
Term life insurance gives you life insurance for a set term. That means you choose a policy and a death benefit (the amount your beneficiaries will get when you pass). But you also choose a term associated with your policy.
At the end of that term (e.g., 10, 20, 30+ years), your policy is set to expire. At that time, you have options. You can let the policy expire, renew it for a new term or — assuming your insurer allows — convert it to a permanent life insurance policy. Many carriers will give you an option to convert your policy to a permanent policy during the term.
Why would you choose life insurance that will expire after a certain time? Simple: term life insurance policies are significantly cheaper than permanent life insurance policies. And, in some cases, you may feel you only need life insurance for a certain time.
For example, some people buy term insurance with a term that lasts the length of their mortgage or until their kids will be done with college. That way, your family can get through major financial milestones with or without you. Once the house is paid off and the kids are educated, you may not be as worried about leaving your partner without your income.
The amount you’ll pay for your term policy depends on a few things: your current age, the term of your policy and the size of your death benefit.
CNN Money has a helpful example to give you a ballpark idea. They say that a healthy 35-year-old male buying a 20-year term policy with a death benefit of $500,000 will pay about $430 a year. At 50, that same male will pay $1,300 annually for the same policy.
Most term life insurance policies (97%,according to the Insurance Information Institute) are level-term policies, meaning you decide a term with your insurer and your death benefit stays the same throughout the term.
But there are other types of term life policies, including yearly renewable policies and return-of-premium policies.
Of course there are pros and cons to term life insurance.
Pros: Less expensive, flexibility in choosing a plan that meets your needs and it's easy to understand.
Cons: Policy expires at the end of the term, which could leave you with nothing. Also, it lacks cash value.
What is Permanent Insurance?
You can probably guess from the name: permanent life insurance is a type of life insurance that stays in effect throughout your entire life. Once you buy your policy (assuming you pay your premiums), your death benefit is guaranteed for your beneficiaries, whether you pass away in 10 years or 80.
But there’s more to the puzzle here. Most permanent life insurance policies come with a cash value component. As you pay your premiums, that money accumulates with your insurance provider. Depending on the type of policy you choose, you might get returns on that cash value in the form of dividends.
There are three different types of permanent life insurance:
- Whole life insurance: You get permanent life insurance plus a cash value component that essentially functions as a savings account. You earn dividends on your policy’s cash value component.
- Universal life insurance: With this policy, you get permanent life insurance plus a cash value component that earns interest based on money markets. You may also be able to adjust your policy’s death benefit (assuming you pass a medical exam). There are a couple of versions of Universal Life and in recent years have proven to be very suitable for many people.
- Variable life insurance: This gives you the most flexibility — but also the most risk. You get permanent life insurance and you can invest your cash value component how you want (stocks, bonds or money market mutual funds). The issue is that if your investments don’t perform well, the losses can eat into your death benefit.
The cost of your whole life policy depends on a bunch of different things: your age, your current health, the type of permanent life insurance you choose, the amount of your death benefit, the insurer you choose — the list goes on. We’d love to give you a figure for how much you can expect to pay, but there are too many variables here.
Generally, be prepared for permanent life insurance to cost between five and 10 times more than a term life policy. For all that extra money, you get a policy that won’t expire and a potential earnings vehicle while you’re alive.
There are also pros and cons of permanent life insurance.
Pros: Policy will last for life and accrue some cash value. And if you have some medical concerns after the policy is issued, it won't affect your policy.
Cons: More expensive, can be more complex and difficult to understand, and the cash value may disappear if the policy isn't structure correctly.
Despite what the financial "gurus" in the media profess, there is no "one size fits all" approach to this. Everyone has different issues, like medical conditions, the budgets and other financial considerations which may determine the face amount of the policy.
A short conversation with us can help determine how much coverage is needed in your budget. Book a phone appointment to have a quick talk to determine your needs and how we can help you secure your family's financial future. In the meantime, stay healthy!
Chris Castanes is the president of Surf Financial Brokers, helping people find affordable life and disability insurance coverage. He's also is a professional speaker helping sales people be more productive and efficient and has spoken to professional and civic organizations throughout the Southeast. And please subscribe to this blog!
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