Buying a term life insurance plan is a great way to give yourself peace of mind during the most vulnerable years of your life – it’s simple, relatively cheap, and offers a lot of flexible coverage options. However, depending on your needs and your changing family life, you may find that a permanent insurance policy could also help you meet certain financial goals.
When most people call in to Quotacy to ask about purchasing permanent life insurance, they are initially looking for a 6-figure face amount (like term plans offer) to cover their entire life. However, since permanent insurance is much more expensive, getting that much coverage often ends up being much more expensive than clients think it’ll be. This isn’t to say that permanent insurance is never the right call – it’s just that it’s a very different product.
Realistically, most people that we consult with don’t need permanent insurance – term coverage can meet most financial needs pretty well. However, in certain situations, permanent coverage can provide a great financial solution, either on its own or combined with a term policy as an extra layer of protection. We’ll break down the most common uses for Term and Permanent insurance to show how each coverage type works best, and how they can complement one another to form a cohesive plan.
In general, term life insurance is primarily used to replace your income and cover financial obligations that have a fixed length of time associated with them, such as a mortgage, student loans, or replacing your income while you’re earning money. A term policy is meant to insure your peak income-earning years to make sure that your family can go on without your support.
They carry term limits because carriers expect most large financial needs to resolve on their own after a certain amount of time – once the kids are out of college and paying their own way, once the mortgage is payed off, and once you retire, the replacement income a term plan offers should be unnecessary, so your coverage can come to an end.
The price of a term plan pays for the peace of mind that comes from knowing that your family will be financially supported if you pass away while they still rely on your income. If you outlive your coverage, it’s a win for everyone involved – you got peace of mind for the duration of your term, and the carrier can use your accumulated premium payments to keep the company going and make sure that the few unfortunate families that file claims are taken care of.
Permanent policies, on the other hand, are used to fill smaller financial obligations at the end of one’s natural life, which often means that it’s geared towards people who are past retirement and without any dependents. These policies can ensure that your final expenses are taken care of – even if you plan to spend your retirement savings.
Any leftover money from a permanent plan becomes a guaranteed legacy you will leave for your family. Most people who need permanent coverage use this money to make sure that their children receive equal amounts of inheritance, or are able to pay estate taxes to keep control of family property.
In some cases, the premium payments that you make towards a permanent plan are invested by the carrier, and the money generated by these investments goes back into your policy, increasing its value and its payout throughout your life. These policies often offer the option to take out loans against the accumulated cash value of your policy, which can offer an easy short-term influx of cash if you need it in exchange for a lower-than-average interest rate. This flexibility can add value as a long-term investment as well, since you have the potential to gain more coverage throughout your life.
Since it’s permanent insurance, the carrier knows that you’ll always receive your plan’s payout as long as you keep paying your premiums. Because they’re sure that they’ll need to pay, carriers set permanent prices much higher than term prices. This helps mitigate that guaranteed loss, and recoup costs in the long run. They’re companies, after all, and they need to make a profit somewhere in order to keep their doors open.
On average, permanent plans cost around 5-10x more than a term plan, so lower face amounts are much more common on permanent policies. For example, a premium payment that would net you a $500,000 term policy could only get you around $50,000 in permanent coverage.
These low face amounts normally work out just fine, because unless you’re a multi-millionaire looking to leave a lot of money behind to make sure nobody fights over your estate, you realistically only need a few thousand dollars in order to pay off your final expenses and fund your funeral. On average, a funeral in America costs between $7,000 and $10,000 from start to finish. A small permanent plan could cover that easily, and you could add more coverage to meet other costs like final medical expenses, inheritance bumps and legal fees, if you anticipate that your family will need it.
Long story short, a permanent plan is best suited for reducing the inconvenience of a death when it inevitably happens, and making sure that all of your financial loose ends can be tied up with minimal hassle for your family. If you don’t have plans to save for final expenses in advance, and the financial burden caused by your death would hurt your family, a permanent life insurance policy might help you deal with those financial pressures to make sure that your passing isn’t worse than it needs to be.
Assessing your Needs
Being realistic about your family’s needs is crucial for evaluating which type of coverage you need. While having a guaranteed 6-figure payout as a permanent plan is appealing in theory, it’s often a much better call to separate your needs into two camps: needs that are contingent on your continued income, and needs that will persist even after you stop receiving a regular paycheck, or that will be caused by your death when it happens.
The clients that we typically work with (working-age people with families, student loans and mortgages) can normally cover their immediate financial obligations through term coverage, and are able to deal with final expenses after retirement effectively by putting a dedicated savings plan into effect. However, if you decide that you need a permanent insurance solution to meet your needs, the Quotacy team can help you apply.
If you’d like to learn more about permanent insurance, or if you just want to go over all of your options, get in touch with one of our licensed agents and we’d be happy to help find the coverage plan that’s right for you.
Photo credit to: Robert Couse-Baker