When we talk with clients about life insurance, one of the most common questions we hear is “What type of life insurance should I get? Which one is better?” Unfortunately, the answer is an unsatisfying “it depends.” Our goal as an agent is not to tell you what to do, but to explain your options and help you make an informed decision on which product might best fit your situation. The answer is not the same for everyone, so being open with your agent and asking questions is the best way to determine what type of life insurance you should get.
There are two types of life insurance: (1) Term Life Insurance and (2) Permanent Life Insurance, sometimes called Whole Life Insurance.
Term Life Insurance
Term Life Insurance is meant to provide coverage for a specified period of time. Common terms might be 5, 10, 20, or 30 years. At the end of the term, the policy expires and life insurance coverage ends.
People tend to use Term Life Insurance to provide protection for short-term debts. For example, if you have a 30 year mortgage, you may want to get a 30-Year Term Life Insurance policy to provide protection for the length of the mortgage. If you were to pass away during the term, the funds from the life insurance could be used by your spouse to pay off the outstanding mortgage amount.
A benefit to Term Life Insurance is that you often get larger amounts of coverage for lower premiums as compared to Permanent Life Insurance. One of my favorite analogies for Term Life Insurance is that it’s a bet between you and the insurance company. The insurance company bets that you will outlive the term and you’re betting that you won’t. Since the company usually wins the bet, they’re more willing to offer larger amounts of coverage at lower premiums.
Permanent Life Insurance (Whole Life Insurance)
Permanent Life Insurance is just what it sounds like – a life insurance policy that provides protection for the length of your life, as long as you pay the premiums. Premiums for Permanent Life Insurance are higher than a Term Insurance Policy for the same coverage amount. Take our betting analogy into consideration. Because there is a 100% chance that the policy will pay out, the insurance company knows that they’ll lose the bet. As a result, they adjust the premiums to reflect the expected payout of the policy coverage amount.
People tend to purchase Permanent Life Insurance for a number of reasons, including the same reasons for purchasing Term Life Insurance. But since Permanent Life Insurance does not expire after a specified term, it can also be used for future planning. Consider funeral costs, the costs of settling an estate, or the desire to leave a legacy for your family.
A benefit to Permanent Life Insurance is that it can accumulate cash value over time. You can borrow from this cash value to help with emergencies expenses or a down payment on a home. This is a great living benefit of a Permanent Life Insurance, but keep in mind that this is a loan. If you don’t pay back the amount you borrowed, it can reduce the death benefit of the policy.
Why Not Both?
Excellent question! There is no rule that says you have to choose one type of life insurance or the other. It’s pretty common for someone to have some of both Term Life and Permanent Life insurance. It’s good to have some Permanent Life insurance in place because it provides lifelong coverage. But, because Permanent Life insurance is expensive, you can supplement it with some additional protection provided by a Term Life insurance policy to help cover those short-term debts.
There really is no right or wrong answer when choosing which type of life insurance to put in place. Maybe the only mistake is not looking into it before it’s too late. If you have someone in your life that you love or depends on you financially, a life insurance policy is a way to continue taking care of them even after you’re gone. If you’re a business owner, life insurance could help provide security for your business if a partner or key employee were to pass away.
Give your agent a call today to talk about life insurance and how it could provide protection for the things most important to you.