Now that you understand the basics of how life insurance works, let’s discuss the different kinds.
There are two major groups that everything falls under, term and permanent life insurance.
Term Life Insurance
This is by far the easiest to understand and the least expensive.
It also happens to be the type of insurance we recommend to more than 90% our clients.
You purchase insurance for a specific “term” which typically ranges from 10-30 years. This is pure life insurance. You are paying your money (premiums) in return for financial protection in the event of your death. That financial protection comes in the form of a payout from the insurance company to your beneficiaries.
You choose 2 main things for your term policy:
- A number of years for the coverage to remain in force known as the “term”.
- The amount of coverage you desire which will be the payout in the event of death.
That’s it. There are no investment components with term like there is with permanent life (explained below).
What Happens When the Term Is Up?
You do NOT receive the premiums you paid back if you live (unless you paid extra for a return of premium rider). But you are alive, so what are you complaining about!?
Let’s look at an example with both scenarios:
Jack purchases a 20-year term policy on his own life with his daughter Lauren as the beneficiary. He chooses $500,000 in coverage.
Jack pays the premium on time each month but dies in a car tragic crash in year 8. Lauren receives the $500,000 payout from the insurance company.
Jack is still alive at the conclusion of the 20-year term. Lauren still has her father.
Another way to look at it is like car insurance. It’s something you pay for along the way but hope you don’t get into any crashes and have to use it.
Unlike car insurance, it is not mandatory to own life insurance however it’s hard to see a scenario where at least SOME life insurance is necessary.
At the conclusion of 10,15,20,25,30 year term you have a choice to make:
If it has served its purpose and you feel you no longer need it, you are done and walk away.
If you need additional coverage you will need to renew the policy which will be based on your age at that time. So yes, you will almost surely be paying more than 20 years ago when got it the first time.
Most policies will require a new medical exam and review at this time unless you have chosen the guaranteed insurability rider.
Additional Customization on Term Insurance Policies
Some term policies can also be designed to have benefit amounts and premiums that may increase or decrease over time to fit the needs of your life. We have written an article that explores these options deeper. Your trusted insurance adviser can help you figure whether or not they make sense.
Why Is Term Life Insurance so Popular?
- Simplicity – It’s pure insurance that is easy to understand
- Considerably lower cost-comparable permanent life policies can be 20 times more expensive.
- Flexibility to match your life– you can tailor the length of time and coverage to fit where you are in your life. Let’s go back to Jack and his daughter Lauren in the above example….
Jack choose the 20-year term because Lauren will be 26 at the conclusion of the term. He expects she’ll be fully supporting herself by that time. Additionally, Jack’s mortgage will be completely paid off by then leaving him with very few debts. He plans to leave the house to Lauren in his will.
Bottom Line: Term is cheap and easy to understand. It is the right fit for most people.
Permanent Life Insurance
A permanent life insurance policy is just the way it sounds, permanent and meant to be with you forever unlike the fixed time frame of term insurance.
At its core, these are still life insurance policies and provide a death benefit for your beneficiaries.
Additionally, permanent life policies offer a savings or investment component that accumulates cash value over time. This cash value can be borrowed against for a large purchase or remain in your estate to be passed to heirs.
Due to the cash value component, the premiums will be significantly higher than comparable levels of term.
If you decide to cancel the policy at some point, policies can be surrendered for their current value.
There are several different types of permanent life insurance depending on how you want the savings and investment component to be structured:
- Whole life
- Universal life
- Guaranteed universal life
- Indexed universal life
- Variable life
- Indexed universal life
The point of this article was to understand the main differences between term and permanent life insurance. We do have a separate guide that goes into more detail on the different types of permanent life products listed above.
Bottom line: While a great fit for certain situations, permanent life policies have lots of moving parts and can be very complex. Please consult a trusted and knowledgeable life insurance agent to discuss what is right for you.
If you have any questions on the differences between term and permanent or anything related to life insurance, please feel free to contact us.
Always happy to answer questions with no pressure or obligations.
We ONLY sell life insurance so it’s our specialty.