For the average consumer who needs basic life insurance, term life insurance is the easiest and most affordable way to get enough coverage. But permanent life insurance has advantages for investors with particular goals—estate planning needs, for instance, or the desire for a policy that lasts for their lifetime. And who’s to say you can’t have both? Of households that have life insurance, 30% have both permanent and term policies, according to a LIMRA study.
What is Term Life Insurance?
As its name suggests, term life insurance is a policy that lasts for a particular "term"—20 years, say—and at the end of that term, the policy ends. If you die while coverage is in effect, your beneficiaries receive the policy's death benefit. If you don't, no one gets anything. Term insurance is generally the most affordable way to cover your life insurance needs, but there are no bells and whistles.
What is Permanent Life Insurance?
Unlike term life insurance, permanent life insurance is a combination product: It provides life insurance coverage, but there’s also a cash value piece to your policy, which acts like an investment account. Over time, a portion of your premiums goes toward a cash value account, which grows over time at a specified rate. And if you continue to pay the premiums, a permanent policy lasts until the end of your life.
What Are the Advantages and Disadvantages of Term Life Insurance?
The biggest advantage of term life insurance is that it's affordable. For those who strictly need life insurance coverage (and that's anyone with dependents who would be left in a financial bind if you died and they lost your income), term insurance is the cheapest way to buy a large amount of coverage. Experts generally recommend 10 to 12 times your income in life insurance, or you can use a calculator like the one at 53.com to calculate your life insurance needs.
What Are the Advantages of Permanent Life Insurance?
Beyond insurance needs, there are several reasons you may want to add permanent life insurance to your plan.
- You Can Borrow Against It. Once you’ve amassed some cash value, you can borrow against permanent life insurance if needed, for things like emergency expenses or education. There’s no application or qualification process, and the loans don’t appear on your credit report. You’re not required to repay the loan, but any outstanding balance will be deducted from the insurance death benefit.
- It Lasts Forever. There’s a reason it’s called “permanent” life insurance – as long as you pay the premiums, you’ve got coverage, even if you get ill or develop a health condition. This can offer great peace of mind if you’re concerned about leaving loved ones in a tough financial position when you die.
- The Policies May Come with Extras. Some permanent life insurance policies offer things like chronic illness riders, which allow the policyholder to access the life insurance benefits if they develop a chronic illness. This can provide a sort of long-term care insurance, which can be invaluable when you consider that someone turning 65 today has a nearly 70% chance of needed long-term care services at some point.
- You Can Use It for Estate Planning. Because the policy will be around for as long as you pay the premiums, you can factor your permanent life insurance into your estate planning. The proceeds could be used, for instance, to pay estate taxes when you die, or to provide an inheritance to your heirs. Some investors use their life insurance payout to provide for a charitable cause of their choice.
- You Can Count on the Returns. Unlike money you have invested in the stock market, the investment portion of your permanent life insurance will grow at a guaranteed rate.
What Are the Downsides of Permanent Life Insurance?
- It’s Pricier. If you’re just looking for life insurance coverage, term life insurance is the most economical way to cover all your needs. Premiums for permanent life insurance will run you a higher price.
- You May Not Get the Best Rate. If you’re looking for cash growth, some advisors suggest you’d be better off investing your money in a taxable account instead—you can achieve investment growth without the added expenses of a life insurance policy. But while there’s the opportunity for higher returns, there’s also a chance that a market decline could crush your savings.
- It Takes a While to Build Up Cash Value. If you’re purchasing a permanent policy in order to borrow against it, you’ll have to wait—it generally takes five to ten years before you have enough cash value to make this possible.
For basic insurance needs, term life insurance is still the best choice. But if you’ve got additional goals – you want coverage for your whole life, you’re hoping to leave a legacy, or you want the freedom to borrow against the cash value of your policy—permanent life insurance can be a valuable part of your retirement plan.