Most people purchase life insurance because of love. They have loved ones that could be affected by their death. Life insurance can be a huge financial relief for those that lose a loved one and need to pay not only the funeral costs, but all of the other day-to-day bills like the mortgage, the credit cards, or the car payment. Or, you may even be thinking ahead about your children’s college tuition, which can also be paid for with life insurance.
If you’ve been thinking about purchasing a life insurance policy, you’ve probably noticed that there are two main kinds of life insurance: term and permanent.
Term Life Insurance
Term insurance is an affordable option for life insurance because it only covers you for a period of time, not your entire life and it doesn’t accumulate any cash value. When a life insurance company considers an applicant, they focus on the risk of that person and the likelihood of them filing a claim. Age and health are critical factors, so if you purchase coverage while you are young and healthy you can lock in a great rate for the duration of your term policy.
When your term ends, your coverage ends. Policies often have terms available for 10, 15, 20, 25 or 30 years. Term insurance is designed to protect your dependents in the event you die prematurely. If you die within the term, your beneficiaries receive the death benefit. If you don’t die, there is no payout.
Term life insurance is great for those that want to financially protect their loved ones for a certain period of time when you feel your family would experience the most financial devastation if you were to die. The payout replaces your income and can help your family pay for expenses that you currently take care of and even future expenses such as college tuition.
Ideally, your need for term life insurance would end when the term expires. When your kids are grown and on their own, the house is paid off and you have money saved and a retirement plan.
If you decide to extend or renew your policy at the end of your term, your premiums will be higher since you are older and most likely aren’t in the same health as you were when you first purchased your policy. There’s also a chance that you may be denied coverage because of health conditions. At this point you may want to consider a term conversion. A term conversion is when all or some of your term life insurance policy is converted into a permanent life insurance policy. Most term policies include a conversion option and allow you to convert to a permanent policy regardless of your health as long as you do so before the deadline on your current policy.
Permanent Life Insurance
Permanent life insurance is a bit more complicated than term life insurance and is offered through a variety of life insurance products. We’ll discuss the most common type of permanent life insurance: whole life insurance.
As a result of having lifelong coverage, you have higher premiums than term insurance. As long as you continue to pay your premium payments, you’ll have your permanent life policy until you die.
Premiums won’t increase
With some types of whole life insurance products, the premiums remain the same throughout the entire policy. The policy is structured to be lifelong, and as long as you maintain the premium payments, the policy will be in force regardless of age and health conditions.
Protection lasts a lifetime
While term insurance offers protection for a specified period of time, whole life insurance offers lifelong coverage.
As you pay your premiums, your policy accumulates cash value. The value grows slowly and is tax deferred, so you don’t pay taxes on it while it’s accumulating. You can borrow money against the account or surrender the policy for cash. However, if you don’t repay the policy loans with interest, your death benefit will be reduced. If you surrender your policy, your coverage is surrendered as well.
Choosing between term and perm life insurance
Both types of insurance have their benefits. It’s a personal decision on what type you choose. Your age, financial situation and lifestyle factor into your decision.
Term life is great when:
- You only need life insurance to cover a specific period of time.
- You want the most affordable coverage.
- You are unsure and may want a more permanent coverage in the future. Most term policies can be converted to a permanent coverage. Deadlines for conversions vary by policy, so if you have a term policy, it’s good to review it.
Consider permanent life if:
- You plan on spending your retirement savings, but still want to leave a legacy or money for final expenses.
- You need to create inheritance equalization. Perhaps you have land or a business that you plan on leaving to one child, you can provide a fair inheritance to your other children using life insurance.
- If you have a very large estate that you will be leaving behind, you may want to provide life insurance to help your heirs pay estate taxes. Without a life insurance payout, parts of your estate may need to be sold off to pay taxes.
It’s easy to run term life insurance quotes on Quotacy.com. If you’re curious about pricing, go ahead and play around with our quoting tool without giving any personal information. If you’re curious about permanent life insurance, we have staff with years of experiencing putting permanent products in force as well. Contact us and we can help you determine what type of insurance is best for you.