Term vs. Permanent Life Insurance. According to industry experts, most people don’t have enough life insurance. LIMRA, which keeps close tabs on the industry, recently reported that average coverage equals $163,000, which is equivalent to approximately 3.5 years in terms of income replacement (with the average income being $46,800 in 2019, according to the Bureau of Labor Statistics). That’s only half the recommended 7-year threshold.1,2,3
Furthermore, more than half of consumers said their households would be in immediate or near-immediate financial trouble if the primary wage earner died today.2 When considering life insurance, one of the most important factors is the difference between term and permanent insurance. Here’s an inside look at both.
Term and Perm
Term life insurance is temporary; it provides a death benefit for a specific term, such as 10, 20, or 30 years. Unlike other types of life insurance, it does not accumulate a cash value. If the policyholder dies during that term, their beneficiaries benefit from the policy. When the contract ends, so does the coverage.
This limited term leads to term life insurance’s main advantage: price. Generally, term life insurance costs less than permanent life insurance, especially if the purchaser is younger. This has the potential to free up funds for other household expenses.
Permanent insurance remains in place as long as the policyholder makes payments. In addition, permanent policies are designed to build up “cash value,” a cash reserve accumulating with the policy. Typically, this cash reserve pays a modest rate of return. However, the policyholder has limited access to the funds.
Which Should You Choose?
Term life insurance can be designed to provide protection against upcoming expenses, such as putting children through college. On the other hand, permanent life insurance can be more useful for covering long-term financial needs, such as estate planning.
Many people find that they have short- and long-term needs. In such circumstances, it may be prudent to have both types: a basic level of permanent life insurance supplemented by a term policy. A review of your situation may help determine what type of life insurance is appropriate.
Several factors will affect the cost and availability of life insurance, including age, health, and the type and amount of insurance purchased. Life insurance policies have expenses, including mortality and other charges. If a policy is surrendered prematurely, the policyholder also may pay surrender charges and have income tax implications. It would be best to consider determining whether you are insurable before implementing a life insurance strategy. Any guarantees associated with a policy are dependent on the ability of the issuing insurance company to continue making claim payments.
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1. LIMRA, 2018
2. U.S. Bureau of Labor Statistics, 2019
3. American Council of Life Insurers, 2018
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