There are two types of life insurance: permanent and term insurance. Permanent insurance is exactly that – life insurance intended to cover you for your entire life. Term insurance, on the other hand, covers an individual for a specific period of time. Within these types of life insurance, there are many variations and riders, but here we will focus on the basics.
Permanent insurance, which can be traditional whole life, variable life or universal life insurance, is more expensive than term insurance, because it is intended to last for your entire life and because it accumulates cash value. A portion of your policy premiums, less any commissions paid to your insurance agent, is put into a savings program of sorts, and it accumulates value over time, along with any dividends that are paid. The longer you have the policy, the more money accumulates.
Some financial experts use a benchmark of 20 years as a good guideline when deciding which type of insurance to purchase. In other words, if you plan to have your life insurance for more than 20 years, permanent insurance is probably a good option for you. Because of the cash value, life insurance is sometimes used as an investment.
Term insurance, on the other hand, is a policy intended to provide only a death benefit for a specified period of time, usually ranging from 10 to 30 years. Because your policy does not accumulate cash value, the premiums are significantly lower than those for permanent life insurance. Premiums may be level or they may increase over time, depending on your policy. Most term policies can be converted to permanent insurance if the insured provides evidence of insurability (i.e., good health). Term life insurance is typically purchased when cash flow is a concern, or when short-term coverage is all that is desired.
Which type of policy do you need? That question is best answered by a qualified insurance agent or investment advisor as part of a larger financial planning discussion. The answer will depend on a lot of factors including your age, health and financial goals, and your decision should be based on your specific circumstances.
If you’d like to learn more about permanent and term insurance, or have questions about how these products fit into your financial planning, please ask. We’d be happy to answer your questions.
To your wealth,
Joseph M. Maas, CFA, CVA, ABAR, CM&AA, CFP®, ChFC, CLU®, MSFS, CCIM
President of Synergetic Finance