Tips for Deciding Between Term Life Insurance and Permanent Life Insurance

You receive them regularly in the mail: offers for life insurance at super-low premiums per month. Previously, you haven’t paid much attention to them, but now, with a spouse and a young family, you’re beginning to think purchasing a life insurance policy is a good idea.

However, when you research your options, two types of policies keep coming up: term life insurance and permanent life insurance. So what’s the difference between the two, and how do you know which option is right for you?

The Difference Between Term Life and Permanent Life Insurance

In order to make an informed decision, first you need to know the difference between the two types:

Term life insurance is a policy that you purchase for a predetermined number of years. The coverage lasts for the term of the policy. For example, if you purchase term life insurance for 20 years and a claim is filed during that time, your beneficiaries receive the specified death protection. However, at the end of the coverage term, if no claim has been filed, there is no restitution of premium funds.

You can change this by purchasing a return of premium term life insurance. Note that though you receive a considerable sum if you outlive the term, the monthly premiums are also significantly higher than standard term life insurance.

Another variation on term life insurance is mortgage term life insurance, which provides funds to pay off a mortgage in the event the insured dies prematurely.

Permanent life insurance offers full coverage for the entire life of the insured. It consists of two parts: a savings element and an insurance element. The savings element can be entirely or partially structured as an investment portion, which offers the potential of earning more returns on your premiums. Because of the savings or investment part, permanent life insurance is typically more expensive that term life insurance.

How Do I Know Which Option Is Right for Me?

Typically, term life insurance is an appropriate choice for:

  • Young couples with limited financial resources who want to ensure the surviving partner has the resources to cover credit card debts, personal loans, medical and funeral costs, as well as other expenses in the event one of them dies. Remember: even though you lose an income, all of the commitments you’ve made as a couple still continue on until the surviving spouse can change them.
  • Young families with limited financial resources who want to provide for their children until they can function independently. Securing additional funds for what suddenly becomes a one-income family, as well as providing funding for education, are important considerations.

Note that some insurers offer the option to convert a term life policy into a permanent life policy.

Permanent life insurance is appropriate if:

  • You’ve met your other financial planning needs, including your 401k, education funds for your children and emergency funds.
  • You can afford the higher premiums.
  • You want a higher return on your investment.
  • You want your beneficiaries to receive a considerable payout after your death, regardless of when that is.
  • You want the option to borrow or withdraw the cash value of your policy at any point in time.

If you want to find out more about which option is best for your situation, contact our experts here at Liberty Financial Group. We will advise you objectively and, in the event you decide to purchase a life insurance policy, find out which insurer offers you the best deal.

Sources

http://patch.com/connecticut/milford/how-much-life-insurance-do-i-need-do-i-need-it-all-patch-advisor-report-0

http://www.forbes.com/sites/timmaurer/2013/05/03/term-vs-perm-life-insurance-in-90-seconds/