Independent Insurance Brokerage, LLC

Term Vs. Permanent Life Insurance

When considering life insurance, it's essential to understand your choices.

According to industry experts, most people don't have sufficient life insurance. LIMRA, which keeps close tabs on the industry, recently reported that average coverage equals $168,000, or 3.4 years in income replacement. That's less than half of the suggested 7-year threshold.

Furthermore, more than half of consumers said their household would be in direct or near-direct financial trouble if the primary wage earner died today.

When considering life insurance, one of the most important factors to understand is the contrast between term and permanent insurance. Here’s an inside look at both.

Term and Perm

Term life insurance is temporary; it provides a death benefit for a specific duration, such as 10, 20, or 30 years. Unlike other types of life insurance, it does not accumulate a cash value. If the policyholder dies during that term, his or her beneficiaries receive the benefit from the policy. When the contract terminates, so does the coverage.

This limited term leads to term life insurance’s main advantage: cost. Generally, term life insurance costs less than permanent life insurance, especially if the purchaser is younger. This has the potential to free up funds for other household costs.

Permanent insurance remains in place as long as the policyholder makes payments. In addition, permanent policies are intended to build up “cash value,” a cash reserve that accumulates with the policy. Typically, this cash reserve pays a modest rate of return. However, the policyholder has limited access to the funds.

Which Should You Choose?

Term life insurance can be intended to provide security against upcoming expenses, such as putting children through college. Permanent life insurance, on the other hand, can be more beneficial for covering long-term financial needs, such as estate planning.

Many people find that they have a blend of short- and long-term needs. In such situations, it may be prudent to have both types: a basic level of permanent life insurance supplemented by a term policy. A review of your situation may help determine what type of life insurance is suitable.

Several circumstances will affect the cost and availability of life insurance, including age, health and the type and amount of insurance purchased. Life insurance policies have expenses, including mortality and other charges. If a policy is abandoned early, the policyholder also may pay surrender charges and have income tax implications. You should consider determining whether you are insurable before implementing a strategy involving life insurance. Any guarantees associated with a policy are dependent on the ability of the issuing insurance company to continue making claim payments.

Term or Perm?

In 2016, (the most recent year for which statistics are available), people purchased more permanent life insurance policies than term life insurance policies. Of Policies bought, 60% were permanent insurance while 40% was term insurance.