(5 min. read) Life insurance can be a crucial financial planning tool by providing financial protection for your loved ones when you pass away. Whether you are just starting a family and learning how much you will be spending on diapers, or your retirement date is on the calendar, and an important goal is providing a financial nest egg for your family as well as a legacy, life insurance might be able to help.
Two types of life insurance, term life insurance and permanent life insurance solve different financial concerns. I will describe some differences between these two types of insurance to begin helping you make an informed decision.
Life Insurance Frequently Asked Questions – Click Here
What is Term Life Insurance?
Term life insurance provides coverage for a specified period, or “term,” which can range from one to thirty years. If the policyholder passes away during the term, their beneficiaries receive a sum of money, tax free, known as the “death benefit.” However, if the policyholder outlives the term, the policy will expire. There will be no death benefit.
The number one advantage of term life insurance is its affordability. Because it provides coverage for a specific period, the insurance premiums are lower than permanent life insurance. This is a great option when “cash flow is king.” Also known as “the baby is on the way” and you are not sure of your new budgetary needs.
However, term life insurance is temporary coverage and does not build cash value. Additionally, if the policyholder outlives the term, the insured’s family will not receive any death benefit. If health permits, a new policy must be purchased to continue coverage.
There are ‘riders’ (benefits) that can be added to some term policies to extend the duration, provide business coverage needs, etc. I am available to review these details.
What is Permanent Life Insurance?
As the name suggests, permanent life insurance is designed to provide coverage for the policyholder’s entire life. Unlike term life insurance, permanent insurance policies have no set time limit.
An important advantage of permanent life insurance is providing long-term coverage that can build cash value over time. The policy accumulates cash value available to fund a range of financial obligations including paying premiums, securing temporary loans, funding retirement income. An important benefit of permanent life insurance is providing financial security to your family, loved ones, or even a favorite charity. A well-funded permanent life insurance policy can achieve multiple financial goals regardless of your retirement account performance.
Conversely, there can be downsides of permanent life insurance. First, the premiums are higher compared to term life insurance. The premium should slide into your budget – not trigger financial stress. Next, permanent life insurance policies can appear complex which may make them harder to understand when compared to term life insurance policies. It is important to work with an independent life insurance expert to clearly explain policy mechanics.
Third, there are various kinds of permanent life insurance policies: Whole Life, Index Universal Life (IUL), Guaranteed Universal Life (GUL), Variable and Second-to-Die policies, etc.
Which Type of Insurance is Right for You?
Each person’s financial needs are unique and evolve over time. Choosing between permanent life insurance and term life insurance can be a challenging task. In general, if you are looking for affordable coverage for a specific period, term life insurance may be the best option. However, permanent life insurance may be a better fit if you are seeking long-term coverage, a way to build cash value, or trying to leave a legacy.
What is the best way to determine which type of insurance is right for you? Consult a financial professional providing independent life insurance advice. We can help you assess your needs and goals. We can help recommend the type of insurance that will help achieve your goals.
