With so many individual life insurance options in the marketplace, it’s understandable when people start to feel overwhelmed and confused while determining which type of insurance plan best fits your family’s needs.
To help you decipher the complexities between varying life insurance policies, this post details the two differing types of insurance—term life insurance and permanent life insurance—and weighs the pros with the cons of each type, so you can make a well-informed decision when choosing your insurance policy and protecting your family’s current and future financial needs.
Term Life Insurance vs. Permanent Life Insurance
What is Term Life Insurance?
Sometimes considered temporary life insurance, term life insurance is a policy that provides insurance coverage for a specified period of time. The most common coverage periods for term insurance are for 10, 20, and 30 years, but there are more customizable options available with certain policies. Particularly appealing for those with dependents relying on their income, term life insurance provides your declared beneficiaries with a specified death benefit amount if you should pass away within the covered period of time, provided you maintained timely premium payments.
Most term life insurance policies can be renewed after the initial period expires, but premium costs often change, and your policy may require an updated health exam to reissue coverage. Out of all insurance policies, term life insurance typically provides more coverage for less money. According to Policygenius, term life insurance is six-to-ten times less expensive than permanent life insurance policies.
Term Life Insurance Pros and Cons
Pros:
- Most affordable insurance option available
- Straightforward, simple insurance coverage
- Ideal to cover expenses and protect those dependent on you in case of premature death
- Can renew coverage at the end of period, though premium likely will increase
- Guaranteed death benefit, as long as premiums are paid and death occurs within the specified coverage period
Cons:
- Coverage expires at the end of term period
- Renewal premium rate tends to skyrocket
- Offers no cash value or investment opportunities
What is Permanent Life Insurance?
There are a variety of permanent life insurance policies that differ slightly from one another, but they share the same characteristic of providing coverage for your entire life, as long as you continue to pay premiums. In addition to offering standard coverage with death benefits, permanent life insurance policy includes an investment component. A permanent insurance policy uses your monthly premium to cover the cost of insurance and the insurance company’s fees to maintain your death benefits, and any remaining money from your premium gets put towards cash value, according to ValuePenguin. Your cash value is your unique investment component within your permanent life insurance policy. Varying policies differ in how they specifically invest your cash value. Here are two common types of permanent insurance policies offering lifelong coverage with the benefit of varying investment components:
- Fixed Life Insurance: Perhaps more widely known as whole life insurance, fixed life insurance gets its name from offering a consistent premium rate and a fixed interest rate to accumulate tax-deferred cash value, throughout the entire length of the policy. Your cash value accrues interest based on “a formula the insurance company determines,” as described by Investopedia. This is a great permanent life insurance option for those looking to have more predictable premium payments and cash value growth.
- Variable Life Insurance: Also referred to as variable appreciable life insurance, this permanent insurance provides you with more customizable investment options. Your cash value will be invested within subaccounts, which operate much like mutual funds. According to ValuePenguin, variable life insurance differs from other permanent life insurance policies because it “comes with a prospectus detailing around 20 to 30 options for investing the cash value,” such as within an index, equity portfolio, bonds, or money-market fund. Because of the more specialized investment opportunities, you have the added benefit of professional investment management with a variable life insurance policy. Since the interest rate is determined by the unique investment(s) made, your cash value earning potential varies greatly. Out of all life insurance policies, variable life insurance has the highest earning potential for cash value. However, your cash value is also influenced by the ebbs and flows of the economy, so it does come with considerably more investment risk.
Depending on the specific permanent life insurance policy and insurance carrier, one benefit of permanent life insurance is that you can access the cash value if you should need it. According to NerdWallet, you can borrow a loan against your policy or surrender your policy for cash, but not paying back the loan with interest will reduce your death benefits.
Permanent Life Insurance Pros and Cons
Pros:
- Lifetime coverage that doesn’t expire as long as premiums are paid
- Ideal for leaving a legacy and protecting your estate
- Tax-deferred built-in investment component for maximum growth potential
- Possible annual dividends with some policies
- Guaranteed death benefit, as long as premiums are paid
Cons:
- More expensive premium rates
- Insurance fees to manage investment component, higher with variable life insurance due to professionally managed investments
- Returns on your cash value investments not always guaranteed in certain policies
Need Help Choosing Which Life Insurance Policy Is Right for You?
If you’re in the market for life insurance, it may be a good idea to speak with an independent financial advisor who can help weigh the pros and cons of each insurance policy based on your unique situation. At Focus Financial, we understand how important it is to you to ensure protection for your family should the unexpected happen, and we offer a variety of financial planning services to give you peace of mind, knowing your family’s future is secure.
Contact Focus Financial today to schedule a free consultation where we’ll find a financial advisor who’ll work closely with you to understand your family’s unique needs and financial goals, and help you find a life insurance policy that’ll best support and cover your family.
