When it comes to life insurance, it’s important to have an understanding of what you’re buying before you buy a product that may not be the best option for you, your family, or your long term financial, estate, or tax planning. The most common life insurance options are term or permanent.
While each has their advantages, there are distinct differences that you need to know before signing the dotted line on a policy.
- Premiums vary depending on age, income, and health.
- Term is significantly less expensive than permanent life insurance.
- Permanent is a lifelong commitment but it has its benefits like tax free withdrawals.
Consider your needs today as well as in the future when thinking about terms vs. permanent life insurance.
Term Insurance
While term life insurance is the less expensive option, experts estimate that as many as 95% of policies go unpaid. This is due in part to policyholders outliving the policy. For example, a 40 year old make buys a 20 year term life insurance policy. It’s likely he will live past 60 years old when the policy expires.
That doesn’t mean term isn’t worth purchasing to protect your family in the event of your death or the death of your partner.
Term life insurance is purchased for confidence.
It’s lower cost and there’s no long term commitment. If you don’t want the policy, you just stop paying the premium. It’s that simple.
There’s confidence in knowing if the policyholder dies, their named beneficiary receives the insurance payout. Often people purchase policies in the amount to pay off their mortgage and bills or college tuition in the event one partner dies.
It is important to note the cost of a term life insurance policy increases as you age. That means the 40 year old in our example will pay significantly more if he wants another term policy when he is 60 years old and his current policy has expired.
If you’re looking for a longer commitment, consider permanent insurance.
Permanent Life Insurance
Permanent life insurance is used to describe whole, ordinary, variable, and universal life insurance policies that carry a cash and face value. Unlike term, permanent life insurance covers the insured as long as they are alive. It’s more expensive than term and is often used for tax or estate planning purposes because withdrawals are tax free.
One of the benefits of a permanent life insurance policy is that it accumulates cash value on a tax-deferred basis. The cash value can be used for a down payment on a home, children’s college tuition, or income during your retirement. The collateral for the loan is based on the cash value of the policy so policyholders are not subject to credit checks like they would be for a traditional loan.
Another benefit of permanent insurance is the ability to use the current cash value as your insurance protection even if you stop paying the premium. In the early years of the policy, there is typically little to no cash value.
The Best Option
Often the best option is to understand what it would cost for term vs. permanent life insurance. Then purchase a term policy because of its lower cost and low level of commitment and invest the difference. Of course, this depends on your personal financial status which can be reviewed by a financial professional and estate planning attorney.
Interested in learning more about life insurance? Call Heritage Financial Strategies at 480-397-1184 to get started today!
