Should you buy Term Life or Permanent Life Insurance? This is one of the first questions someone asks us. Men and women looking to protect their families face this dilemma every day.
Let’s examine the various life insurance products available to help you choose which type of life insurance is best for your particular needs. Life insurance involves many factors including the first basic decision. Term Life or Permanent Life Insurance?
Your decision should be based on both your current and your future projected needs for life insurance. Your budget can also be a major factor in making your decision.
Keep in mind you don’t have to restrict yourself to just one single life insurance policy. It’s not always a term life or permanent life insurance situation.
You may consider buying a combination of policies such as a term policy to cover a specific amount for a limited time period, or several term policies (known as layering or staggering policies) and/or even consider a permanent policy.
If you have group life insurance, it’s probably not enough. If you are lucky enough to have some coverage through work, you should have your own policy as well. That way if you change jobs, you still have your coverage.
You have a variety of options when it comes to permanent insurance because there are many different hybrid forms of these permanent policies and they vary from insurer to insurer.
Let’s look at these life insurance options to help you make a more informed decision. Or, if you’d rather skip to the numbers, use the Instant Quote form on the left to see quotes for term life or permanent life insurance.
Basic Differences between Term Life and Permanent Life Insurance
Both types of policies offer death benefits. The main difference between the two types is that term insurance pays death benefits only, while permanent insurance additionally provides you with a cash value accumulation feature. Which is like building up equity in a home. You can either borrow against it or receive the amount less expenses if you surrender your policy.
Although term can cover you for life, it generally has to be renewed. Many term policies also come with a conversion feature which allows you to convert your term policy to a permanent policy. This is great for someone who has incurred a significant decline in health because he or she can convert the policy without having to take a medical exam. Although the insured must convert the policy before a specific date outlined in the contract.
Term insurance is very cheap to buy when you are young, but if you have to renew the policy 20 – 30 years down the road, it will become significantly more expensive, often many times the original premium. Also, some term lengths will no longer be available after certain ages.
For example, you normally can’t buy a 30 year term after age 58 and won’t be able to get a 25 year term after age 63. After age 80, it’s rare to get a term policy at all.
Permanent policies, on the other hand, cover you for your entire life. They are considerably more expensive because of the cash value accumulation feature which is the savings/investment component. However, the cost difference between the Term Life and Permanent Life Insurance decreases as you age. The prices are competitive at older ages.
Permanent policies also have a savings feature that can be very competitive as opposed to those individuals who invest exclusively in the market. The cash value accumulation feature generally guarantees a minimum rate of return regardless of how the market performs.
Another feature of permanent policies is that you can also borrow against the cash value but it might be around 15 years before you can do so.
Let’s look at both types of policies in more detail.
Term Life Insurance
Term life is the most basic and most affordable form of life insurance available. It is bought in periods of time and can include a variety of policies to suit different needs. It covers death benefits only.
The types of policies you can buy vary significantly. You can get a term as short as a 1 year renewable term, a 5 year, 10 year, 15 year, 20 year, 25 year or 30 year term. You can also find age specific term policies such as age 65. These products are not offered by all insurers so if you need something specific, you should always use an independent agent to find the best deal.
All you have to do is decide on how long you want the insurance in place (the length of the term), and then decide on how much you want for death benefits. Are you trying to cover a mortgage, kid’s education, or your working years?
3 Types of Term Life Policies
There are 3 types of term policies you can choose from and depending on your needs including:
• Level Term is the most common form of term policy. For the most part, your premiums are guaranteed for the life (length) of the term you buy and your death benefits are fixed. If you are looking to cover income replacement and debts, then this may be a good choice.
• Decreasing Term means that you pay a fixed premium for the life of the term, but the death benefits decrease periodically throughout the life of the term. This policy is often used to cover a mortgage.
• Increasing Term is a less commonly available product. It simply means that both your premiums and your death benefits increase at specified increments throughout the life of the term. It may be a good choice for a young couple starting out on a tight budget or young parents with a new baby.
Reasons to Buy Term Life Insurance
Most people buy term insurance to cover needs like:
- Income replacement
- Business needs such as key man insurance
- Business or other loans
- Buy-sell agreements
- Children’s tuition
- Final expenses
- Leaving a legacy
- Donating to a charity
There are many advisers out there claiming term insurance is the better buy and you are better off investing the difference in price between a term life policy and what you would pay for a permanent life insurance policy.
If you are good about consistently investing and watching the marketing, it may be the best plan for you. But, what if you don’t invest or save a certain portion of your income? It’s important to consider your investment habits when making these decisions.
Unless you buy a return of premium rider along with your term policy, you will have nothing to show for your investment when the term policy expires. This is one of the major drawbacks when it comes to term insurance.
Permanent Life Insurance
Permanent life insurance not only provides you with death benefits, it also has a cash value accumulation feature. This allows you to borrow against the cash value accumulation after a specified period of time has elapsed.
Permanent life also covers you for your entire life and does not have to be renewed. Check rates for yourself by using the Instant Quote tool on the left and selecting “Lifetime” under the Type of Insurance.
Why would you want permanent life insurance?
You might want to consider a permanent policy for the following reasons:
- You need the policy to last your entire life
- You need a non-taxable savings vehicle to accumulate savings
- You are distrustful of the market
- You aren’t investment savvy
- You need to create liquidity to cover estate taxes
- You are concerned about asset protection from creditors
- Your need to supplement your 401 (k)
- You want to borrow against it
There are 2 basic types of permanents life insurance policies (plus a variety of hybrids available). The two main types are:
- Universal Life
- Whole Life
What are the differences?
Universal Life Insurance
Universal is similar to Whole Life but with several important differences. They offer the buyer more options on their death benefits, how their premiums are paid and the investment vehicle used for the cash value accumulation feature. You have more options and choices so your policy can be strategically tailored to your particular needs and changing circumstances.
Indexed Universal Life
Indexed Universal Life has more potential than Universal Life Insurance as far as the cash value accumulation investment feature is concerned. The main difference in how the company credits the investment interest. Indexed Universal Life policies are more closely tied to how the stock market is performing. So when the market performs well, you do well. And when the market doesn’t perform well, your policy guarantees you a minimum interest rate.
A whole life policy uses your premium in 3 ways including:
- A portion covers the death benefit
- A portion covers administration costs
- A portion covers the cash value accumulation
There are 2 types of Whole policies which include:
- Participating Whole Life
- Non-Participating Whole Life
A participating policy means that you participate in the profits life insurance company earns and are entitled to receive dividends. With a non-participating policy, you do not share or receive any dividends.
Whole life insurance is an easy and safe way to supplement other retirement savings options. With whole life insurance you get lifetime insurance protection and the ability to accumulate cash. This can can be accessed tax-free and may be used to supplement your retirement savings.
Bottom Line on Choosing Between Term Life or Permanent Life Insurance
Should you buy term life or permanent life insurance? Either way, you have a variety of ways to address your life insurance needs. Every set of circumstances has many appropriate solutions. There are even options blend several policies into a single hybrid policy using both term and permanent life insurance policies.
The life insurance policy you choose should depend on your needs, circumstances and reasons for owning life insurance.
How Can I Find Out More About Life Insurance?
Your best bet is to speak with an independent agent like you can find here at Abrams Insurance Solutions. We research each company and the various policies they offer. Then, after shopping around, we put together a comparison for you and offer advice about which life insurance solution might best suit you.
We can obtain quotes from the most reputable and lenient companies and answer any questions you have about life insurance.
Also, we work with over 70 life insurers and keep track of which companies have the most affordable policies, including coverage for a multitude of medical conditions. See rates right now from leading insurance companies for term life or permanent life insurance using our Instant Quotes tool on this page!
Call us right now if you have questions, need some advice, or want to start your application at 858-703-6178. Get the term life or permanent life insurance policy you need today!