Life Insurance: Term or Permanent?
Protect you and your loved ones.
The classic reason to buy life insurance is to provide adequate resources to your loved ones who depend on your income, in case you die prematurely. Life insurance proceeds can:
- Cover your final expenses, including funeral arrangements
- Allow your family to pay off the mortgage and other debts
- Provide an annual income to your family
- Fund college education for your children
Below is more information about the two main types of life insurance.
Term Life Insurance
Term life insurance is straightforward life insurance coverage, whereby you pay a fixed annual premium during the policy term and, if you die during the term, the policy will pay a death benefit to your beneficiary.
For example, a 30-year level term policy with a $500,000 death benefit will have a fixed annual premium for 30 years. If you die during that 30-year period, the policy will pay your beneficiary the $500,000 tax-free death benefit. At the end of the 30-year period the policy goes away.
Permanent Life Insurance
Permanent life insurance (sometimes referred to as “cash value” insurance) is more complex life insurance coverage, whereby your annual premium provides not only lifelong coverage, but part of your premium goes toward an investment component known as the policy’s cash value. Because this type of insurance continues as long as you live and builds a cash value, permanent insurance premiums are much more expensive than term insurance premiums.
For example, for a 30-year-old male, a 30-year level term policy with a $500,000 death benefit might cost about $400/year, whereas a permanent life insurance policy for the same man might cost more than $4,000/year.
Whole life, universal life and variable life are all types of permanent life insurance.
Term or Perm?
We believe term insurance (with a convert-to-permanent option) is the most efficient way to cover the classic need for life insurance for most people. Term insurance allows you to purchase a large amount of life insurance for a reasonable cost and, if you properly save and plan for your future, we feel the need for life insurance becomes much lower once you reach retirement age.
In addition to the above-mentioned classic reason to buy life insurance, there are other, less common, reasons to buy life insurance, such as estate planning, small business ownership, special needs planning, etc. Some of these less common reasons to buy life insurance may be better covered by a permanent insurance policy.
Term Life Insurance | Permanent Life Insurance | |
Coverage Period | Choice of coverage period, | Lifelong coverage, |
Annual Premium | Less expensive | More expensive |
Cash Value | No | Yes |
Convertibility Feature | Yes, available on most term policies, allows policyholder to convert from term to perm | N/A |
Here are a few key questions we ask clients in order to determine how much life insurance they need in the event of a premature death:
- What do you estimate your final expenses, including funeral arrangements, might be?
- Would you like your family to be able to pay off the mortgage?
- Are there other debts you would like your family to be able to pay off?
- What total annual income would you like to provide your family in your absence? Related, will your surviving spouse continue working or rejoin the workforce to provide all or part of the annual income your family needs?
- Would you like to fund college education for your children?
- Would you like to fund a charitable legacy?