• Term vs. Permanent

  • FINANCIAL MISTAKE: Buying the wrong type of life insurance policy for your needs.

    Term Life vs. Permanent Life Insurance

    The type of life insurance you own should match the type of risk you are trying to insure. In other words, is there a temporary need or a permanent need for insurance?

    Term Insurance This type of coverage is designed for coverage for a limited time (or term). This type of coverage is typically much cheaper at younger ages but eventually becomes unaffordable at older ages. Most term policies never pay off as people usually outlive the guaranteed pricing of the term policy. Most group policies typically raise rates every 5 years, whereas individual policies can be guaranteed for 10, 15, 20 or 30 years.

    Term coverage is designed to protect against a temporary risk. Often it is prudent to purchase a combination of term and permanent life insurance.

    Examples of risk situations where term insurance may be appropriate include:

    ♦ To pay off a mortgage if an owner dies before the mortgage is paid off

    ♦ To offset lost income for a spouse while children are being raised or put through college

    ♦ To protect a spouse against an unexpected death of a bread winner before the projected retirement date,
       a situation which would cause retirement savings to fall short of retirement goals.

    Permanent Insurance This type of insurance is designed to be able to be kept for what is assumed to be a person's entire life (although some policies may have a maturity date, such as age 95, which could occur before a person's death). Most permanent policies are designed to build some sort of cash value. This cash value component often allows for the capability to take loans or to walk away with a cash value at some point (the latter would terminate the coverage).

    There are two basic types of permanent insurance: Whole Life & Universal Life (also known as Flexible Premium Life).

    Whole Life is usually the most expensive type of policy. It builds cash value guaranteed and typically the premiums are guaranteed never to increase. Often, higher death benefit potential can be achieved with fixed universal life insurance policies.

    Universal Life is coverage that you can keep permanently, and can be much cheaper than Whole life. Caution: some policies could require higher premiums later to keep the policy in force. Premiums are flexible, meaning that you can pay more or less for the same death benefit. Premium projections at policy issue are based on:

    1. Assumed interest rates being earned on policy cash values.

    2. Current costs of insurance

    Many policies in the past were projected at lower interest rates or cost of insurance than actually occurred. This is why many people with universal life policies may experience drastic rate increases if they life long enough. Often these policies can be replaced with policies with no-lapse guarantees, guaranteeing the premium to maybe age 100 or 120 (click here to learn if your current policy premiums could increase).