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Your Financial Life
By Erica Oh Nataren / Sep 28, 2015

Term vs. Permanent Life Insurance: What’s the Best Choice?

Family with Baby

Turns out, there’s no one best choice for everyone. To decide what’s right for you, know the key considerations and limitations of term and permanent life insurance.

Whether it’s a financial article, blog, podcast, radio or TV show, it seems advice is plentiful when it comes to life insurance — and much of the advice stresses term as the more popular product for your coverage needs.

The fact is, term life insurance may be the product picked by many people. But like most things in life, life insurance isn’t one-size-fits-all.

Is term or permanent life insurance for you?

Ask yourself these key questions:

  • Do you have a limited insurance need over a specific period of time — say, until mortgage payoff? Term life insurance is designed for coverage needs that expire over time, typically 10-30 years, as long as premiums are paid on time.
  • Do you want to use your investible assets for potential income growth? Permanent life insurance is typically more expensive than term life insurance because you’re paying for a cash value policy with tax-deferred growth potential. Some permanent policies allow you to allocate your cash value into accounts that are credited interest based in part on market indexes. But some people prefer to put their money into other financial instruments not available through life insurance. In that case, term can be a better solution for their life insurance needs.
  • Do you prioritize liquidity over tax-deferred growth potential? Any potential growth on the cash value of a permanent life insurance policy are tax-deferred — a great plus when you’re looking to outpace inflation. But permanent life insurance is a long-term commitment. If it’s important that your assets remain liquid, but you are still in need of life insurance, term coverage may be more your style. Low-interest loans and withdrawals are available on the cash value of a permanent policy, but they can impact the cash value growth potential, reduce the death benefit and trigger tax obligations. You can also surrender a policy for its cash value, but you’ll typically encounter significant surrender charges, especially within the first 10 policy years — and you’ll give up the death benefit protection the policy provides.
  • Are you willing to accept any underwriting risk that may occur after the term period expires? The vast majority of term life policyholders outlive their coverage period. If you find you still need protection when your term period ends, you’ll need to reapply for coverage, which can result in higher premiums.

Know your life insurance limitations

Term life usually costs less than permanent life insurance, allowing you to use the premium savings for other purposes. But before you decide, consider these key limitations of term life insurance:

  • It can be difficult to predict future needs. Life is full of surprises, and over time, people can find themselves in changed circumstances: a remarriage, an additional child, a second mortgage, or perhaps an inheritance. Permanent life insurance can last for the insured’s entire life, and can even be used to transfer wealth to beneficiaries.
  • Underwriting risk can change. Those buying term life insurance take the risk that if additional coverage is needed, they may no longer be insurable or insurable at an increased risk level, resulting in higher premiums.
  • Financial alternatives may lack tax advantages. Permanent life insurance enjoys tax advantages not all financial alternatives have: tax-deferred growth, and tax-free access (in many cases) to the policy’s available cash value via withdrawals and low-interest loans.

If you’re not sure whether term or permanent coverage is right for you, many carriers offer term coverage options that allow you to convert the policy to a permanent one within a certain period of time, without having to reapply.

You can also get the best of both worlds by purchasing a combination of term and permanent coverage. This can help you get the higher coverage amounts you may need earlier in life at more affordable rates, while enjoying the financial flexibility and other lifetime benefits a permanent policy can provide.

Bottom line: There’s no one right answer to the question of whether to buy term or permanent life insurance — and only you can answer that question.

If you need help finding the answers, speak with an insurance agent or financial advisor. Help gain the peace of mind that your tomorrows will be protected, for better or for worse.

Use our Insurance Plan Explorer to help determine your coverage needs now.

You can also speak directly to an agent at 1-800-209-8913, or via email.

We are the Tomorrow Makers®.

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