Even though you know you need life insurance to save for the future and protect the financial security of your family, you may not know which type is best for your current financial circumstances and the needs of your family. This information can help you understand the basic differences between term and permanent life policies.
“The wrong kind of life insurance can do more damage to your financial plans than just about any other financial product today,” according to Ginger Applegarth from MSN Money. This is why it’s especially important to carefully decide which type of life insurance you purchase.
Term life insurance provides coverage for a certain number of years. If the policyholder dies during this time period, the plan pays out a death benefit. One disadvantage to this type of policy is that its benefits are limited to its death benefit, so if you live longer than the policy length, there is no payout. The main benefit to term life insurance is its affordability.
“Term insurance can be a good fit for younger individuals and families, who need protection against the loss of income of a primary earner for a stated period of time, at an affordable cost,” according to Daniel Solin from the U.S. News. “For many consumers, the only way they can afford the coverage they need, for the time when they need it, is through term life insurance.”
The other type of policy is a permanent life policy, which combines death benefits with what is known as a “cash value.” Because the part of the premium that is placed into the cash value continues to grow due to earned interest or dividends, the older a policy gets, the more it’s worth. Because permanent life policies include cash value, they’re more expensive than term life plans with comparable death benefits.
“According to independent insurance consultant Glenn Daily, permanent insurance can make sense for consumers who need to create liquidity in order to pay projected federal estate taxes,” states Solin. “He also recommends permanent insurance to those concerned about asset protection, where state law provides that the cash value and death benefits of insurance policies are not subject to claims by creditors.”
To sum up these differences, term life policies only benefit the families of people who die before the policy runs out while permanent life policies benefit those who out-survive their plans, as well as the families of those who don’t.
There are several different types of permanent life insurance, including universal life, whole life, variable universal life, variable life and index-universal life. All of these plans are structured to invest your premium in different ways, and they also have varying structures for payouts.
Traditional whole life is a popular choice because it offers the most guarantees. The annual premium and minimum cash values and death benefits are all guaranteed. This type of plan is good for more conservative investors that have trouble saving.
Universal life provides more flexibility with varying premiums each year. It may even be possible to skip a year.
“Universal life has maximum guaranteed premiums and minimum guaranteed cash values and death benefits,” states Applegarth. “Instead of dividends, universal life policies earn interest at the credited interest rate determined each year.”
At the least conservative end of the spectrum is variable life. Variable life provides the fewest guarantees, but it makes up for that by giving investors the chance to make larger increases in their cash value. There is no guaranteed cash value.
“Daily, a fee-only insurance consultant, says that most clients who consult with him end up doing something different than what they had originally planned,” states Solin. “He does not believe consumers are getting the information they need to make an informed decision.”
This is why it’s important to discuss any questions you have about life insurance with your financial institution. It’s a big decision that can have tremendous financial repercussions, so be sure that you’re getting the right information by speaking with a professional. If you have any questions about life insurance or other ways to save, please give us a call.