So, you’ve decided life insurance is a good decision for your family, now the question is should you purchase term insurance or permanent life insurance? This very personal decision should be based on your financial goals and the financial needs of your beneficiaries. Life insurance can be a flexible financial vehicle that can meet various financial objectives, like providing financial security or building financial assets and leaving a legacy.
What are the differences between term and permanent (whole life) policies? Here are some of the features of each:
Term Life Insurance
- Purchased for a specified time (term)
- Easiest and most affordable to purchase
- Provides a death benefit only
- Benefits are only available during the term of the policy
- Must be renewed if coverage is desired past the term (at a higher age bracket)
- Can be converted to permanent life insurance
Permanent (Whole Life) Insurance
- Covers you for your life
- Provides cash value accumulation, as well as, a death benefit
- Typically requires a health examination
- Can be a choice for estate planning
- A portion of the cash value can be withdrawn or borrowed during the life of the policy
- Is more expensive than term insurance because it provides cash accumulation
So, how do I decide?
There are a number of variables and considerations in deciding between permanent or term insurance. Some of the factors to consider are:
- Your current age
- Your current state of health
- The financial needs of your family
- Plans for final expenses (funeral, etc,)
- The age of your children or other dependents
- Your current mortgage or rent and current debts
- Age you want to retire and retirement plan in place
- Future financial needs of your family (college, marriage, etc.)
- Needs for additional retirement income
- Your feelings on potentially paying for a term policy and never receiving any value back
So, if you have children and are the primary income earner or co-earner in your household, you might want to consider purchasing life insurance to cover your family’s financial obligations. Or if you are the primary care giver for the children, you may want to purchase life insurance to cover the cost of providing the care without you.
Adding up all of your living expenses, mortgage or rent, pay off debts, children’s education and other living expenses can help you decide the face value of the life insurance policy your family will need if you are gone. Term life insurance can provide the coverage at a lower cost but does not build equity and ends at the term of the policy. Permanent life insurance is more expensive but builds cash value in addition to the death benefit.
If your children are grown and on their own and your financial needs are different you may want a term policy to provide for final expenses or maybe a term or permanent policy to provide for your spouse’s needs after your passing.
As you can see, there are many factors to consider when deciding what term policy will be most beneficial and many different options to meet your needs.