Most people, up to as many as 51% according to a 2020 LIMRA study, select a permanent life insurance policy. This compares to only 33% who select term life insurance.
But the truth is term life insurance, rather than permanent life insurance, is often the better choice – particularly for those who are young and healthy.
That means there are many people out there who are overpaying for insurance or getting less coverage than what they could have had if they had made the right information to make a more well-informed decision.
So let’s take a closer look at term life versus permanent life, also known as whole life insurance, and see what the real differences between these types of policies are.
Term Life Compared to Permanent Life
To begin with, we should note that if there are people in your life who would be negatively impacted financially by your death then the decision to get life insurance for yourself is a good one.
However, it just so happens that when it comes to life insurance one type of policy may be more beneficial than the other depending on your life circumstances.
For example, permanent life insurance is a policy that lasts for the rest of your life. Most people see this as a major advantage and that is what leads the majority of individuals to get this type of policy.
But is it really an advantage? We will take a closer look in just a moment, after covering some key facts.
First, here is some more information about permanent life insurance policies.
Permanent life is typically viewed as a type of investment vehicle. You are paying monthly or yearly premiums and those payments are, over time, accruing cash value.
Then, if a financial emergency should arise, you can borrow against the cash value or draw money out. Again, a lot of people find having this type of flexibility appealing.
In comparison to permanent life insurance, term life is for a set number of years. Once the policy expires so does the death benefit. Most term life policies expire at a certain age – like 65 or 70 – or after a certain length of time – like 20 years or 30 years.
When is Permanent Life a Good Choice?
Permanent life insurance can be a good choice when a person knows that the death benefit is going to be needed no matter when they die. In other words, if the person has a child with a disability or they know that family members are going to need to pay inheritance taxes or funeral costs, then permanent life can be a good choice.
What Are the Disadvantages of Permanent Life Insurance?
Permanent life insurance has two distinct differences compared to term life that many would consider disadvantages.
For one thing, it is more expensive. As an example a $500,000 whole life policy can cost 10 to 18 times more than a $500,000 20-year term life policy.
That higher price can lead to individuals not being able to afford the amount of coverage their family needs. It can also increase the risk of a person not being able to keep up with monthly premiums and then having their policy lapse.
One way to avoid this situation is by taking advantage of whole life insurance nonforfeiture options.
These options essentially ensure that policy value will not be forfeited if a policy lapses following a defined time period.
The second difference between permanent life and term life insurance is that permanent life policies are more complex due to the investment component of the policies.
The truth is insurance is usually not the most effective and efficient way to save money as the high premiums can offset the policy’s growth. Often, individuals can find better investment returns in such things as IRAs and 401Ks.
One option to save more money here is called an overfunded whole life insurance policy. In this case, the individual pays more into the policy than what the premiums call for in order to build up the cash value.
For reference, a whole life insurance policy endows when the cash value equals the death benefit.
These types of policies can also be complex in their language and benefits. For example, when applied to whole life insurance the word “straight” denotes the premium structure of the policy. Straight means that premiums will be level and will not increase or decrease during the policy life. This is just one example of the many nuances of whole life insurance that may be confusing for consumers.
When is Term Life Insurance a Good Choice?
Term life can be an excellent selection particularly for young, healthy people who have time to take advantage of other more lucrative investment options compared to whole life insurance such as 401Ks or IRAs.
What are the Advantages of Term Life Insurance?
One of the advantages of term life is that people often outgrow their insurance coverage and no longer need it due to the financial growth they experienced over time. With term life insurance this is less likely to happen.
Another advantage of term life is its low cost compared to permanent life insurance. This low cost can make it easy to consistently make premium payments even when difficulties arise, such as the loss of a job or an accident.
There is also another, more recent advantage for term life policies. Many are now coming with what are called “living benefits.”
This feature allows policy holders to withdraw cash in certain circumstances even though the policy does not accrue cash value. That means if a qualifying event occurs, such as a cancer diagnosis or a heart attack or stroke, the term life holder could be able to access needed cash.
Something else to consider with term life insurance is called convertibility option term life insurance.
Convertible term insurance allows the policy holder to trade in their term policy for permanent life. So, hypothetically, you could start out with lower cost term life insurance and then switch over to permanent life when you are able to pay the higher premiums.
One thing to keep in mind about term life insurance, experts say, is that the goal of these policies is for them to not pay out.
They should be viewed more as protection, like car insurance. The policy is there to provide for family members should you die unexpectedly, not to act as investment vehicles.
The Bottom Line
The decision to purchase life insurance is an important one and one of the biggest components of that decision is determining whether to get permanent life or term life.
When attempting to make this decision, be sure to carefully analyze your current situation, including your physical health and your financial health, as well how your death would impact those close to you.
With this information you can then go about deciding whether it makes more sense to pay more and get a permanent life insurance solution or to spend less now and go with term life that provides coverage for only a specific period of time.
Be sure to carefully compare prices and policy benefits online and you may also want to speak with a financial advisor who can help you find a solution that best fits your needs.
Whatever you do, don’t take the choice between term life and permanent life lightly. This decision can have a significant impact not just on your future wealth but also the well-being of your loved ones.
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