The biggest question to answer when purchasing life insurance is whether you need a term or permanent policy. Each type has advantages and limitations. To make the right decision, you should know and understand your options. Here are a few questions to consider:
- How will the money from this policy be used?
- Do my life insurance needs span my entire life or a specific period of time?
- Do I want to accumulate cash value or just have death benefit coverage?
- How much life insurance do I really need and what is my budget?
Keep in mind that you can use a blend of products to meet distinct life insurance needs.
TERM – COVERAGE OVER A SPECIFIED PERIOD
Term life insurance likely meets most life insurance needs. It provides coverage for a limited period of time to satisfy a temporary need, such as debt payment or income replacement. Term life insurance is usually the least expensive; however, the insured must die within that specific period of time (usually between one and 30 years) for beneficiaries to collect on the policy. Term life insurance does not accumulate cash value. Our blog, Take care when naming your life insurance beneficiary, offers some additional guidance.
Consider, too, that many term life products can be converted to permanent products depending on the conversion privilege in the policy. For more information, see our blog, Conversion privileges: Invaluable life insurance benefits.
PERMANENT – COVERAGE FOR LIFE, USUALLY WITH CASH VALUE
Permanent life insurance is best known for providing lifelong coverage and cash accumulation. Premiums are usually higher and continue for a longer time period. These policies generally are for needs such as final expenses, estate planning and tax-deferred income. Permanent life insurance comes in two basic forms: whole life and universal life.
Whole life products are all about guarantees. These products provide guaranteed coverage, guaranteed cash values and guaranteed premiums. Because of the strong guarantees, these products are often the most expensive. Whole life policyowners can request loans against the tax-deferred cash value. That cash can be used in an emergency and repaid later or simply subtracted from the death benefit of the policy. They also usually feature these additional policy value options:
- Automatic premium loans – uses funds from the cash value to pay any overdue premiums
- Extended term insurance – premiums cease and the policy’s cash value is used to keep the same death benefit in force for whatever term the cash value permits
- Reduced paid-up insurance – premiums cease and the policy’s cash value is used to keep a reduced death benefit in force for an amount the cash value will purchase
Flexibility is the biggest advantage of universal life policies. The cash value grows based on an interest rate or potentially an investment component. Funds can be taken out as loans or withdrawals; however, the policyowner may have to pay a penalty for withdrawals in the early years of the policy. Another advantage of universal life policies is that the premium amounts and death benefits can be changed to suit your needs.
Based on each unique situation, term and permanent life insurance can meet a broad range of life insurance needs. Knowing what those needs are and developing a plan to address them can be a daunting task, but a skilled insurance advisor is an invaluable resource. Take the time to review product types with an independent agent to better understand the pros and cons of different types of life insurance.