Term Life Insurance vs Permanent Life Insurance
There are many kinds of life insurance, but they can generally fall into two categories, term insurance and permanent insurance. When comparing the two options you can draw parallels with your food choices, one option may have long term benefits and the other has immediate benefits. Both options are good depending on what your short term and long term goals are.
It can be a time consuming undertaking, but if you have children or other dependents, life insurance should be of utmost importance. Few who have bought life insurance have been able to avoid the debate over term vs. permanent insurance. The wrong type of coverage can have an impact on your financial plans.
Term Life Insurance
Term insurance, the simplest and most affordable way to buy insurance covers death benefits only. This is an excellent option if you require insurance for a certain number of years. Term life primarily protects against pre-mature death. It also protects against certain debts with a time constraint, such as a mortgage.
Term insurance provides coverage for temporary needs.
Term life can save you money and allow you to purchase a larger death benefit because you are only paying for the cost of insurance and building no cash value. You can buy term insurance for terms such as 10 or 20 years. With many term policies the coverage is renewable but be aware that premiums generally increase to reflect your age at the end of the term, increasing company costs among other reasons.
With the increasing cost of term insurance you may want to opt for permanent insurance if your insurance needs are for 20 years or more. You may have heard the saying, “buy term and invest the difference”. It really depends on how long you plan to keep your policy, because the cost of term can become much more expensive than permanent insurance in the long run. Premiums for permanent insurance generally remain level over the life of the policy.
Permanent Life Insurance
Permanent life insurance provides life long protection
Permanent insurance is really a combination of a life policy offering death benefits and a savings called cash value. The longer the policy is in force the higher the cash value will be. It usually takes a few years before the policy holders see any returns.
The premiums for permanent insurance are initially more expensive than term because the insurers average the cost of insurance over the years taking into account increasing risks as you get older. Although permanent insurance is a very common form of life insurance some people do not expect to be paying premiums until they die. At the time of retirement, many people begin using the accumulated cash value to supplement retirement income.
The following are a few points that you should consider when selecting the type of insurance that best suits your needs.
- How much can you afford?
- Who is being insured?
- How many years is the coverage required?
- What is your life expectancy?
Due to possible health issues in the future and higher premiums as you age, it is important to consider obtaining the proper coverage for life at a young age.
If permanent insurance is the route for you, but you cannot afford the costs, buy term insurance that can be converted at a later date. It is better to have some form of insurance than none at all.
About the Author
Neil Lecky is a Life Insurance Advisor, Group Employee Benefit Specialist and an Investment Funds Advisor with Alliance Financial Group. He is also a Branch Manager and Investment Funds Advisor with Investia Financial Services Inc., a mutual fund dealer.