THE PROS AND CONS OF TERM VERSUS PERMANENT LIFE INSURANCE

Term insurance is a type of life insurance that has a specific duration such as ten, twenty, or thirty years. At the end of the term policy, the policy owner has the option to continue coverage at significantly higher premiums or the desired term length may not be available because thirty-year term is not available over age fifty, twenty-year term is not available over age sixty five, and ten-year term is not available over age seventy five. In contrast, permanent life insurance will last the entire life of the policy owner or until a certain age such as age 100, at which point the permanent life policy matures and the insurance company will pay out the cash value that has accumulated over time.

A major advantage of term insurance is the low cost required to protect your family for the duration of the policy. The beauty of term insurance is that it locks in your health today up to the initial face amount of the term policy. For example, let’s say you decide to take out $1 million term policy for twenty years. If twenty years from now you decide to convert into a permanent life policy, you will automatically qualify for $1 million in death benefit WITHOUT any medical exam required. The premium twenty years from now will be based on your age at that time but not on health because your health today will be used to determine the premium.     

However, a major disadvantage of term insurance is that statistically there is good chance you will outlive the policy. At the end of the term policy, there is nothing to gain from all the years you have paid into the policy. With permanent life insurance, the monthly premium is guaranteed to remain the same for the rest of your life regardless of health issues. Permanent life insurance also has a cash value that accumulates over time and can be tapped into tax-free for whatever reason. Theoretically, there comes a point down the line where you could stop paying into the policy and the cash value will continue to grow beyond the original face amount, assuming the policy has built up enough cash value. 

Index Universal Life is a flexible permanent life policy that allows you to pay anywhere from the minimum amount to the maximum amount each month. Obviously, the more you pay the faster the cash value will grow. Assuming there is enough cash value, the flexibility feature of Index Universal Life allows you to miss payments due to financial constraints and still be able to keep the policy in force. This is a major advantage of Index Universal Life in comparison to other types of life insurance where you have to continually pay a monthly premium, otherwise the policy will lapse.  Index Universal Life is currently capped out at 10% and has a minimum guaranteed floor of 0%, so you can never lose money. There is no other investment instrument like Index Universal Life that allows you to take advantage of a death benefit component and participate in the upside potential with zero downside risk.

The idea behind term insurance is that it protects your family for a specific duration when your kids are young or when there is a mortgage outstanding. In the future when the kids are all grown up and the mortgage is paid off, there is no longer a need for term insurance. Term insurance is a powerful instrument that serves a useful purpose. However, if you’re more concerned about building up a nest egg, then permanent life insurance is the way to go. The question boils down to personal choice. Are you more concerned about protecting your family when your kids are young and there is a mortgage to pay off? Or would you like to have a cash value that builds up over time? Whatever you decide to do, the decision is up to you based on what you think is most important to you and your family.

Most young people make the mistake of thinking they don’t need life insurance because they’re young and healthy. However, that is misguided because it rests on a major assumption that they cannot die. Unfortunately, accidents do happen and the unexpected do occur. Young people may think they don’t need life insurance until a later age. However, at a later age, life insurance may not be available due to health issues or, if available, premiums could be much higher and the desired term length may not be there. Young people may think they would be wasting money on life insurance because they have a much longer time to live. However, permanent life insurance has a cash value that builds up over time and can be accessed in retirement so the younger they are, the more time they have to build up the cash value. For young people, the idea of life insurance is to lock in the health and premium today and allow the cash value to accumulate over time.

If you’ve been thinking about getting life insurance, now is the time. There will never be a better time than now. We never know what will happen in the future, but one thing for certain is that you will get older and your health will deteriorate. Now is the time to lock in your health. If you think you’re not in a position to afford life insurance, a life policy can be crafted to fit any budget you can comfortably set aside a month and slowly increased over time as your financial situation changes. We insure our autos, our homes, our pets, and some of you may even have a warranty plan to insure your electronics. Why not insure your family? Your family, by far, is the most important thing we need to insure. Please reach out to our office to make sure your family is properly protected.