When getting a life insurance policy, you first must decide between term vs. permanent life insurance. The main difference is the lasting period. Permanent life insurance policies offer lifelong coverage, while term life insurance policies cover a specific period.
Buying life insurance is a huge step for everyone and is often difficult. Hence, in this article, we will cover:
- What is term life insurance?
- How to get term life insurance? How does it work?
- Who needs term life insurance?
- What are the different types of term coverage?
- Benefits and drawbacks of term life.
- What is permanent life insurance?
- How to buy permanent life insurance, and how does it work?
- Pros and cons of permanent life insurance.
- What are the main differences between term and permanent life insurance?
- Which one is more beneficial for you?
- How to manage all of your financial goals?
We have hands full, so let’s jump in!
What Is Term Life Insurance?
Term life insurance is straightforward: it covers the insured person for a fixed period, usually 10, 20, or 30 years. If the policyholder dies during the term, his beneficiaries will receive a death benefit. The death benefit and insurance premiums are often guaranteed to stay the same during the term.
The smart way of having a term life insurance policy is to match its length with the financial obligation you want to cover. It can be anything from college tuition, mortgage, or buying a new house. New parents might buy a 20-year policy to secure themselves until their kid no longer relies on them financially.
How Does it Work?
One of the reasons why it is so easy to understand and buy term life insurance is the opportunity to apply online or in person. For beneficiaries, every policyholder can choose one or more people. After approval, the insured enters into a contract with the life insurance company.
They agreed to pay the death benefit in exchange for premium payments. If the insured dies before the term ends, their beneficiary will get the death benefit amount in a tax-free lump sum. If the insurer is still alive when the term ends, there are multiple options:
- They can cancel the policy if they don’t want coverage anymore
- They can renew the policy
- They can convert part (or all) of the death benefit to a permanent policy
Types of Term Life Insurance Policies
Although all term life insurance lasts for a specified period, there are three options to choose from – decreasing term, annual renewable, and level term.
Decreasing Term Plan
With decreasing term insurance, the policyholder can increase the coverage term for a set period. It isn’t required to re-qualify for new coverage. It is called decreasing because the range falls over the policy’s life at a predetermined rate.
Annual Renewable Plan
This plan allows policyholders to renew their policy annually without having to reapply or undergo a medical exam. On the other hand, the premium increases each year, but the coverage amount stays the same. This plan is often used to repay short-term debts. In other cases, it’s not the best option.
Level Term Plan
This plan is the most appealing option for term life because it offers the same premium and death benefit for the policy’s life. The level-term plan is often more expensive than the first two options, but it’s shown to be more cost-effective in the long run.
How to Get it?
Term life insurance is straightforward even when it comes to purchasing. An individual can buy it online, directly from an insurance company, or through an agent or broker.
A good option for people unsure which type of life insurance they need is to talk to a financial advisor in person. For purchasing a policy from an insurance company, look up financial strength ratings through agencies (for example, AM Best and S&P Global).
Who Needs a Term Life Insurance Policy?
It’s impossible to list every position in which someone should get term life insurance. However, we highlighted the cases when people usually get it.
- Business owners use it to pay off debts, outstanding taxes, and expenses for their business.
- People with outstanding loans can use term life insurance to pay off their debt.
- Stay-at-home parents can use their policy as an income replacement or pay expenses such as childcare.
- Young and newlywed couples can benefit from term life coverage because their rates will be lower. Proceeds can be used for anything from replacing income to repaying off student loans and covering future expenses like education costs for their children.
Advantages
- Straightforward and uncomplicated. It’s easy to apply, and most commonly, people don’t need help from professionals because it’s obvious to manage.
- Less expensive. Monthly expenses are lower than with permanent life insurance. Remember that you don’t get the same product, so it’s not strange that they don’t cost the same.
- Tax-free death benefit. If the policyholder dies while the policy is active, their beneficiaries will receive money that will not be taxable.
- Multiple policy options and flexible payment. Applicants can choose how long they need coverage, from one to 30 years. They also can decide when they’ll pay premiums – monthly, quarterly, semi-annually, or annually.
- No penalty for canceling. If an individual cancels a term policy while it’s active, there wouldn’t be any fees or penalties.
Disadvantages
- Temporary coverage. We will cover later in the article benefits of permanent coverage, but most people prefer it over temporary coverage. There is a danger that an individual could suffer health reverses and be uninsurable when the term coverage expires.
- No cash value. With term life insurance, you can’t build cash value; if you cancel it, you won’t get any money back.
- Upper age limit. This limit depends from company to company. But people up to age 50 are usually allowed to apply for all term lengths. People who are 60 or older can only use ten or 20-year-term.
What is Permanent Life Insurance?
Permanent life insurance policies support lifelong coverage while also offering the opportunity to build cash value, which accumulates on a tax-deferred basis. The fantastic idea is allowing policyholders to tap into the policy’s cash value while they’re still alive.
Permanent insurance is more expensive than term, but it offers more features and benefits.
Furthermore, age, health, lifestyle, and how much coverage you want are the factors that influence the cost of permanent life insurance. Younger and healthier people will have lower costs.
When an individual applies, life insurance companies consider these factors and then give you an estimated price for the policies. After that, you will have a clear picture of whether it fits into your budget or not.
How Does it Work?
A permanent life insurance policy typically guarantees death benefits, and premiums are set at a fixed rate.
The death benefit from this policy can be used as an inheritance. If the policyholders name their beneficiaries on the policy, the payout will go directly to them. If someone has a lifelong dependent like a child with disabilities, life insurance can fund a trust to provide care for them when the policyholder dies.
After a waiting period, the policy starts to accrue cash value. It’s not rare that the policy’s cash value can be cashed out entirely.
Types of Permanent Policies
The main types of permanent policies are whole life, universal life, and variable life.
A whole life policy has a fixed premium and fixed payout. The interest rate applied to the policy stays the same during the policyholder’s lifetime and creates a guaranteed death benefit.
The main characteristic of a whole life policy is the opportunity to borrow money against your policy. It is at a low rate of interest and without a credit test. We prefer this type of policy, and later in this article, we will return to it.
Universal life insurance is more flexible than whole life insurance. That means universal life premiums and death benefits increase or decrease over the policyholder’s lifetime.
After every monthly paid premium, that amount is divided into the death benefit and the cash value. Life insurance companies charge a minimum premium to maintain the policy, but it is possible to pay more to grow the cash value faster.
So, in whole and universal life, the cash value of the policy grows, but the difference is in whole life, it’s fixed, while in universal life, it isn’t. Depending on current market conditions, rates may increase or fall, but they don’t fall below a set minimum rate.
Variable life insurance offers the most flexibility, but also it’s the most riskier option.
Individuals get permanent life insurance and can invest the cash value component however they want. However, losses can eat their death benefits if the investments don’t perform well. It’s the main issue with this type of permanent coverage.
Who Needs a Permanent Life Insurance Policy?
Permanent coverage is supposed to accomplish two different goals:
- To provide a safety net or an inheritance for the policyholder’s loved ones in the form of a death benefit that pays out when they are gone
- To support individuals in accumulating savings, they can borrow later in the form of a loan.
If you put it this way, it’s evident that it can apply to everyone.
When deciding which life insurance policy to choose, consider your needs, budget, and goals in buying coverage. We know a monthly budget can be unstable, but remember that we are also planning our future.
Maybe get a side hustle or start charging your hobby to establish a better income and more manageable policy payment. Most importantly, the effort for a permanent life insurance policy is paid off. It can be tricky in the present, but work towards your future!
Usually, people who decide to get permanent insurance have these goals:
- Lifelong protection because of the family who financially depend on them.
- Wish to build wealth and leave it to heirs.
- Ambition to capitalize on a policy as an investment vehicle
- Seek to make sure their family gets the money to pay funeral expenses and others.
Benefits of Permanent Life Insurance Policies
The most significant benefit of having a permanent life policy is providing coverage for the entire life along with a cash value component that can grow over time. Due to that, you can ensure that your beneficiaries will be secure when you die. Besides that, this type of policy has many other benefits:
- Cash value accumulation. Most permanent policies have a cash value component that supports the death benefit growth and helps hedge against inflation. Thus, the cash value has the central role in making the death benefit worth more than it would be without it. When the cash value starts growing, it can be used to supplement retirement income or as a loan. Another huge benefit is that money from the loan is considered tax-free income.
- Flexible premium payments. It varies from type to type, but some permanent life insurance allows people to stop making payments while enjoying the coverage’s benefits. For instance, some policies offer the option to pay higher premiums for a shorter time (10 years) and then never have to pay a premium again.
- Extra tax benefits. Permanent life insurance supports a variety of tax advantages. Once again, it depends on the type, but some advantages include income-tax-free dividends on life insurance, tax-free policy loans and withdrawals, a tax-free death benefit, and tax-deferred cash value growth.
Drawbacks of Permanent Life Insurance Policies
Of course, there is another side of the coin.
- Costs. The most significant drawback of permanent coverage is that it is significantly more expensive than term life insurance. Some people point out that having coverage your entire life is unnecessary.
- Non-convertible. Unlike term life insurance, you cannot convert to other types of the policy if you find out it doesn’t suit your needs or you no longer need coverage.
- More complicated. Since it has an investment component, many people need professional help to manage it. Indeed, if you are ready to commit and take the time for research, you can do it independently.
Term vs. Permanent Life Insurance: Key Differences
We saw these two types of life insurance policies individually, and now it’s time to highlight the main differences.
- Length of coverage. Term life insurance provides coverage for a specific period (from one to 30-year terms), while permanent life insurance is designed for financial protection during the entire life.
- Cost of premium. At first, term life premiums are lower. But, they usually increase upon each renewal. On the other hand, permanent life insurance premiums remain the same for as long as the policyholder lives.
- Cash value. The majority of permanent insurance has a savings component that is known as cash value. The longer a policyholder pays into policy, the more its cash value grows. And every individual can choose to cash in or borrow against it and use the funds as they wish. Contrary, term life insurance doesn’t accumulate cash value.
- Convertible policies. With a term insurance policy, you can convert it to a permanent policy if you change your mind, while permanent policies aren’t exchangeable.
Term vs Permanent Life Insurance: Which One Should You Choose?
The choice depends on your lifestyle and preferences. However, if your primary concern is affordability, then term life insurance may be a better option for a start. Always keep in mind all drawbacks of this policy.
It would be wise to work toward your future financial goals, including coverage throughout life, building wealth for you and your family and friends, and a retirement plan.
Some people decide to combine both types of insurance. This is the more expensive option, but it allows you to match the duration and insurance needs, which is the most important.
There are also many examples where people combined their whole life insurance with another investment account.
Our experience has shown that permanent life insurance is the best overall solution for most people. Most precisely, a whole life insurance policy. Let us elaborate on why we think that.
Whole Life Insurance
Whole life insurance provides permanent coverage while also having a savings component that accumulates cash.
The policy’s cash value offers a living benefit to the insurer. Thus, this policy can be used as a source of equity.
Even though permanent life insurance is more complicated than term insurance, whole life insurance works more straightforwardly than other types from the same category. Premiums remain the same for as long as the policyholder lives and the cash value account grows at a fixed rate.
Unlike term life policies, the annual premiums are much higher. In addition, a fixed coverage amount with level premiums and benefits stays the same during your lifetime.
Other benefits of whole life are different family options, additional payments for covered accident-related claims, guaranteed rate, permanent coverage, and early payouts in case of a terminal illness.
Your whole life insurance isn’t associated with employment or employers, so you can easily change jobs.
We suggest you do extensive research before buying a policy because it is best to get it from mutual insurance companies. That way, your whole life will produce dividends, adding value beyond the policy’s death benefit.
One of the main reasons to get whole life insurance is complete control. The policyholder can access and use the policy however they wish, without penalties and problems.
With each premium payment, some money goes toward the cash value component, and this account grows at a rate specified by the policy. After each payment, the cash value accumulates at a taxed-free rate.
One of the main policy features is accumulated cash value you can utilize as you wish. It can be used for mortgage pay-off, buying even more coverage, or putting into your retirement savings.
Let us introduce the fundamental reason we suggest whole life insurance over anything else – the Infinite Banking Concept.
Gain Financial Freedom
The Infinite Banking Concept, also known as overfunded whole life insurance, is a financial strategy that leverages whole life insurance and supports you to build wealth and stop depending on traditional banks.
The basic idea of the Infinite Banking Concept is to help you solve any financial problem and put you in control over your needs. It allows you to borrow against your policy while accumulating cash and earning dividends.
Thus, you will have a traditional banking system (borrowing and re-paying) but without banks. That means it’s time to say goodbye to high-interest rates, application fees, interest charges, loan agreements, and everything else banks do to decrease your profit.
So, if you want to start infinite banking yourself, first, you need to ensure the best whole life insurance product. That means choosing a policy that suits your needs, including coverage rate, premium rate, and ability to drive dividends.
I know sometimes it sounds too good to be true, but luckily many wealthy people prove that this strategy works. The critical requirement for success is a good whole life insurance policy.
Final Thoughts
We know how stressful and problematic deciding which life insurance plan to choose is, but take it easy! If you’ve clicked on this article, it means that you’re responsible and ready to research, learn, and find out what would be the best option for you.
We hope this article helped you see all aspects of two main types of life policies: term and permanent life insurance. Both have their own benefits and drawbacks, but the most important thing is choosing one that suits your needs.
If you saw whole life insurance as a more appealing option, we’d like to encourage you to watch our free masterclass and discover what this policy can do for you.