Term Insurance or Permanent Insurance

Most of us believe that insurance is only for our loved ones when we die, but some types of life insurance fulfills a variety of personal needs and wants while we are still living. The following points can help you decide how to choose between term insurance, permanent insurance, or a combination of both.

Term Insurance

Advantages

  • Cost of insurance is lower. If you are healthy, you can buy dollars for pennies
  • Ideal for young families who have a limited budget but have a need for lots of insurance
  • Coverage lasts between 5 and 30 years. For example, if a person has 24 years left on a $250,000 mortgage, they can get $250,000 of coverage for 24 years.

Disadvantages

  • Once the contract ends, it is expensive to renew
  • If the policy lapses, it is very difficult to reinstate
  • Term policies do not accumulate cash value
  • Coverage ends

Permanent Life Insurance

Advantages

  • Offers coverage for the insured’s entire life as long as the premiums are paid
  • Premiums can be flexible or fixed depending on different financial needs
  • Significant tax advantages
  • College savings inside of cash value do not increase the parent’s expected financial contribution for college
  • No probate. If a spouse passes away, the proceeds from insurance can’t be used to pay outstanding debt in the insured’s estate
  • The policy accumulates cash value, which the insured can access during his or her lifetime and, if structured properly, can provide income during retirement

Disadvantages

  • Initially larger premiums are required to properly fund this type of policy
  • Some plans provide few or no guarantees, and while increased benefits may occur, poor investment performance can cause a reduction in the cash value account, the death benefit, or both. Be sure to get the product that best meets your needs and risk tolerance

Combination of Term and Permanent Life Insurance

To determine if you need both types of life insurance, consider using the DIME method:

D = Debt – If you pass away prematurely, you want to make sure you consumer debt like outstanding car payments or student loans for your children.

I = Income – It is recommended that you get between 7 to 10 times your income in coverage. This amount is meant to replace your income for 7 to 10 years.

M = Mortgage – How much does is your mortgage?

E = Education – When your children do go to college, how much will it cost for them to attend college four or five years?

When you add up these four figures, you will know how much insurance you need. Your debt, mortgage and education are temporary, so term is appropriate to cover those amounts. Your income will hopefully increase over your lifetime, so permanent insurance is appropriate for this amount. However, this example is over-simplified to provide a basic understanding. Every individual and family has a different set of circumstances, and therefore, you should see an insurance expert to discuss your specific needs.