Most people understand that life insurance is a tool for taking care of loved ones who depend on them financially. But it’s not just about replacing an income or leaving behind an inheritance—there are many strategic ways to use life insurance that go beyond protecting your family.
If you decide to buy life insurance for yourself, one of the first decisions you’ll have to make is whether to buy term or permanent insurance. Which one is right for you will depend on what you want from your coverage. Here are the basics to help you get started.
Term life insurance is purchased for specific term periods. Permanent life insurance is generally intended to cover you for the rest of your life.
Term vs. perm: What’s the difference?
Term life insurance
Term life insurance is the simplest and generally least expensive form of life insurance. It’s mainly purchased to protect people who depend on someone else’s income for their basic living expenses if that person dies. The most common example is parents with young children.
Term insurance is purchased for a specific amount of time—usually 10 to 30 years—and the death benefit is only paid if you die during the coverage term. If you do die during that term, your beneficiaries can use the death benefit to help pay off a mortgage or other debts, or simply maintain their lifestyle after you’re gone. The death benefit is typically paid in a lump sum that is generally free from federal income taxes.
Term coverage is generally more affordable than other types of coverage. Premiums typically stay the same for the duration of the initial term, but they may jump significantly if you continue coverage beyond the initial term. If you’re concerned about your family or other people you care about struggling financially if you died unexpectedly, term life insurance can be a cost-effective solution.
Permanent life insurance
Permanent life insurance is different in that it’s designed to cover you for the rest of your life—not just within a specific term. This type of insurance comes in three categories—traditional whole life, universal life and variable life. It can seem complicated and expensive, but the additional features and costs may help people solve for what they want to achieve. Like term insurance, it can help protect your beneficiaries if you die unexpectedly, but permanent coverage can also be used to help transfer wealth or provide funding to help ensure business continuity. Most permanent insurance policies also accumulate cash value you can access through tax-free loans and withdrawals if you need it for retirement income or other future expenses. As with term insurance, the proceeds of permanent life insurance typically pass to beneficiaries free from federal income taxes.
There are different categories of permanent insurance, but we’ll focus on “universal” life insurance. Universal life insurance typically offers flexibility to increase or decrease your premiums and coverage amounts throughout your lifetime. Depending on the product, universal life insurance can have differing goals. Some products are focused on accumulating cash value, and others are focused primarily on guaranteeing a certain death benefit.
Accumulation-focused policies
Accumulation-focused policies provide not only death benefit protection, they are also designed to accumulate “cash value” over time that can be accessed later. The cash value grows tax-deferred and, depending on the policy, may be accessed for things like college expenses, funding a business or even supplemental retirement income.
Death-benefit-focused products
If your primary focus is maximizing the death benefit that passes to your beneficiaries, these products can provide a death benefit that is guaranteed not to lapse—as long as premiums are paid as illustrated—regardless of interest rate changes or other factors that are outside of your control.
With its guarantees, flexibility and cash value component, permanent life insurance is typically more expensive than term life insurance. But in exchange for higher premiums, you can receive lifetime coverage and the death benefit proceeds can help you leave a legacy to loved ones, leave money to charities, fund the transfer of a business to a partner or family member, help fund your retirement or other expenses, and even help cover estate taxes or final medical bills.
Talk to a professional
Keep in mind that this is a high-level overview of life insurance, and products and features will vary by company. Even term life insurance can be a long-term purchase, so it’s important to know exactly what you’re buying. Make sure you fully understand the features, benefits and costs of any life insurance product before making a decision. Talk to a professional to help you decide what kind of insurance is right for you.
