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Term vs. Permanent Life Insurance

by Kevin McKinley - October 12th, 2014

Posted Under: around the house

It’s still September, which of course means that it’s still National Life Insurance Awareness month. Luckily, the month is almost over, so we’ll soon have time to recuperate from all of the festivities.

But before the month ends, we would be remiss if we didn’t discuss what kind of life insurance most people should buy when they buy life insurance, and where they should get it.

Term, or permanent?

For purposes of this discussion, we’ll define life insurance in to two categories: term life insurance, and permanent life insurance.

Term is known as such because once you qualify, the life insurance stays in force for a pre-determined time period; for instance, 20 years (assuming you continue to pay the premiums). Typically, once the term is up, the life insurance coverage ends.

Permanent, on the other hand, stays in force as long the insured is alive. And again, the assumption is that the premiums are paid. The most prominent types of permanent insurance are whole, variable, universal, and variable universal.

Permanent life insurance has an investment component that, in an ideal situation, can grow to a to a point that it can be used to help cover premium expenses, serve as a tax-advantaged potential source of cash, or be liquidated when the money is needed more than the life insurance coverage.

Why not permanent?

Based on the aforementioned description, you might wonder why someone would forego the additional benefits of permanent life insurance, and instead choose a term policy.

The primary reason is the cost. The premiums for permanent life insurance can often be several times the cost of a term policy. Which is fine, if you’re in a situation that calls for consideration of a permanent policy (such a owning business, and/or wishing to offset potential estate taxes).

But the people who usually are (or should be) shopping for life insurance are younger parents, trying to make sure that they aren’t around, the loss to the children is emotional, but not financial.

By definition, younger parents usually need a sizable death benefit (at least 200 times their typical monthly expenses), yet don’t have enough free cash around to pay for a suitable amount of permanent life insurance coverage.

Therefore, a term policy is usually more suitable, and should remain in effect at least until the kids are out of the house and supporting themselves. And a policy should be obtained on the lives of both working and stay-at-home parents.

Buying right

Many workers have some term life insurance coverage through their job, often with a death benefit that equals one to three times the worker’s annual earnings.

But there are several drawbacks to this arrangement. First, that coverage isn’t likely to be enough to cover what loved ones would need if the worker were to die.

Second, group life insurance policies often charge healthy people more than what the workers would pay if they purchased their own life insurance.

Finally, the group life insurance coverage may stop if the worker stops working for the employer. By that time, the worker may have suffered a health condition that may make obtaining new life insurance difficult, or even impossible.

Shop around

The first place to look for your own term life insurance policy is www.term4sale.com. The site allows you to anonymously compare offerings from several different insurers, and in several different permutations of coverage length and death benefit amount.

If you already have an agent whom you know and trust, ask him or her for a quote (just make it clear that you’re interested in term life insurance only, if that is indeed the case).

If you need to find an agent in your area, you can search for and contact an independent one at www.trustedchoice.com.

Just don’t be surprised if they don’t return your call right away. They’re probably still out celebrating.