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Permanent vs. Term Life Insurance: Which Do You Need?

When shopping around for a life insurance policy, it’s easy to get confused by all the different options that are available. Buying the wrong kind of insurance can easily spell financial disaster if it leaves your loved ones without the protection they need. One of the most important questions you’ll need to consider is whether you should buy a permanent or term policy. There are benefits to both types of life insurance but there are some drawbacks too that you’ll want to consider. Here’s a breakdown of how the two stack up.

Find out now: How Much Life Insurance Do I Need?

How Permanent Coverage Works

True to its name, permanent life insurance is designed to stay in place for your entire life. This type of policy offers a death benefit but can also be used as a savings or investment vehicle. Permanent coverage usually costs more than a term life insurance policy.

You have three primary types of permanent insurance to choose from. Whole life insurance offers fixed premiums for as long as the policy is in effect. As you pay your premiums, you can build up cash value in the policy. Depending on the insurance company, you may be able to receive dividend payments from the policy.

Universal life insurance is another type of permanent policy, offering a little more flexibility than whole life coverage. The policy is attached to an interest-bearing account. You have the option to adjust your death benefit or premiums within certain limits. Generally, you can withdraw or borrow against funds held in the account as long as your premiums are covered. Just keep in mind that any unpaid loans will reduce the amount of death benefits payable.

Finally, you may choose a variable life insurance policy. These policies offer a broader range of investment choices. Variable life insurance may prove a better choice for those more comfortable taking on a higher degree of risk. The value of the policy is tied to market performance. This means your benefits and premiums may decrease or increase over time. You can also borrow against this type of policy, but outstanding loans will diminish your death benefit.

Term Life Insurance Explained

Permanent vs. Term Life Insurance: Which Do You Need?

Term life insurance acts as a short-term financial safety net. Compared to the different types of permanent insurance, term life policies are fairly straightforward. You purchase a specific amount of coverage and the policy stays in effect for a set period of time, usually anywhere from five to 30 years. Once the term expires, you’ll have to renew your policy to continue your coverage. You may also convert it to a permanent policy.

Generally, the premiums for term life are much lower than permanent insurance. Depending on your age, health and the amount of coverage you need a term life policy may cost just a few hundred dollars a year. Some insurers may offer level premiums while others offer graduated premiums that increase after a certain number of years. You can expect your premiums to increase if you decide to renew your policy after its initial term.

Unlike permanent coverage, term life policies don’t allow you to build any cash value. Once the policy expires, you cannot get any of money back unless you included a return of premium rider. If you opt for a policy with this option, you can expect to pay more for coverage.

The Takeaway

Permanent vs. Term Life Insurance: Which Do You Need?

Life insurance should supplement your other assets, not replace them. When it comes to permanent vs. term life insurance, you’ll want what’s best for you. It helps to assess your current financial situation and your overall goals before making a decision.

For example, let’s say your spouse needs cash to pay off debt or cover burial costs. However, you can’t afford a high monthly premium. In that case, a term life policy may make the most sense. On the other hand, if you want to broaden your investments, a universal or variable life policy may offer the returns you’re looking for.

Running the numbers for both types of insurance can guide you towards the kind of policy that fits both your needs and your budget. You might also consider talking to a financial advisor about which option is right for you. A matching tool like SmartAsset’s SmartAdvisor can help you find a person to work with to meet your needs. First you’ll answer a series of questions about your situation and goals. Then the program will narrow down your options from thousands of advisors to three fiduciaries who suit your needs. You can then read their profiles to learn more about them, interview them on the phone or in person and choose who to work with in the future. This allows you to find a good fit while the program does much of the hard work for you.

Photo credit: ©iStock.com/Jacob Wackerhausen, ©iStock.com/shapecharge, ©iStock.com/FatCamera

Rebecca Lake Rebecca Lake is a retirement, investing and estate planning expert who has been writing about personal finance for a decade. Her expertise in the finance niche also extends to home buying, credit cards, banking and small business. She's worked directly with several major financial and insurance brands, including Citibank, Discover and AIG and her writing has appeared online at U.S. News and World Report, CreditCards.com and Investopedia. Rebecca is a graduate of the University of South Carolina and she also attended Charleston Southern University as a graduate student. Originally from central Virginia, she now lives on the North Carolina coast along with her two children.
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