TERM VS. PERMANENT: WHICH DO I CHOOSE?
TERM VS. PERMANENT LIFE INSURANCE
Term and Perm
Just as the name implies, term is limited to a specific and stated duration (or term), such as 10, 20, or 30 years. Unlike other types of life insurance, it does not accumulate a cash value. Think of term insurance like your car insurance, if you do not use it you will not recoup any cash value – it is pure insurance, trading a premium for protection over a specific term and that is all. If the policyholder dies during that term, their beneficiaries receive the benefit from the policy. When the contract ends, so does the coverage.
So what is the benefit, why don’t I just buy permanent insurance then? Well, the benefit of term insurance is price. All else being equal, term insurance is always cheaper than permanent insurance. Using term insurance makes sense for many situations, such as in a mortgage protection strategy. For example, let’s say a new couple purchasing a new home $50,000 down and a $250,000 30 year fixed rate mortgage. Both the husband and the wife are working, therefore both of their salaries contribute to the bills and the largest of them all, the mortgage. Assuming they are relatively young and in decent health (i.e. non-smokers), they can purchase a 30 year term policy to match the term of the mortgage. It may cost them $20-$50 a month to do this. The husband applies for a 30 year term policy at a face amount of $250,000 and includes the wife as the beneficiary. The wife does the same thing. Therefore, if one of them predeceases the other before the mortgage is paid, the term policy will kick out at least as much as is owed on the mortgage at that point in time.
Permanent insurance remains in place as long as the policyholder makes payments. In addition, permanent policies are designed 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 designed to provide protection against upcoming expenses, such as putting children through college. Permanent life insurance, on the other hand, can be more useful for covering long-term financial needs, such as estate planning.
Many people find that they have a combination of short- and long-term needs. In such circumstances, 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 appropriate.
Several factors 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 surrendered prematurely, 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 2018 people purchased more permanent life insurance policies than term life insurance policies. The total number of term policies, however, accounts for approximately 70% of all policies issued.3
Source: American Council of Life Insurers, 2018
1. LIMRA, 2018
2. U.S. Bureau of Labor Statistics, 2019
3. American Council of Life Insurers, 2018