The Beatles vs. Elvis. Star Wars vs. Star Trek. Term vs. Whole. When it comes to shopping for life insurance the decision on whether to get a term or permanent policy is the end-all debate.
Term life insurance advocates say it’s the better option because of its affordable pricing and ample coverage. Others insist permanent life insurance is the way to go because it offers lifetime coverage and a cash value component.
The fact is there are pros and cons to both types of life insurance. When choosing the right coverage for you and your family, it’s important to consider how much of your budget you’re willing to allocate to life insurance coverage and how long you need this type of financial protection.
Term Life Insurance
There’s a reason many experts recommend purchasing term life insurance. It’s one of the simplest and most affordable types of coverage. Its characterized by its set term lengths of coverage – typically 10, 15, 20 or 30 years. If you were to die during the term length, your beneficiaries are paid an income tax free death benefit equal to the policy amount you purchase.
The right term length for you might be until your kids are financially independent, your mortgage or student loans are paid off, or you’ve accumulated enough wealth to cover debts or final expenses. (And, choosing the right term length is very simple with an online term life insurance calculator.)
Once the term length is up, coverage ends or you have the option to extend it further, but the premium price will be significantly higher since you’ll be older and likely less healthy.
Term life insurance allows buyers to get higher amounts of coverage for a significantly lower cost compared to other life insurance policy options like whole, universal or even burial policies.
Cost of Term Life Insurance
Like any other type of insurance coverage, term life insurance requires a monthly or yearly premium to remain covered. For a very healthy 35-year-old man with a spouse and young children, a Haven Term policy would cost:
Term life insurance might be the right choice if you:
- Are looking for a low-cost option for financially protecting your spouse and children
- Are seeking to replace your income to help your partner cover the day-to-day bills if you were no longer around
- Need coverage until your children are financially independent
- Need a policy to help pay specific cosigned debts (i.e. a mortgage or student loans)
- Have, or plan to have, substantial money saved for retirement
- Agree with many term life advocates on the “buy term and invest the rest” strategy
Drawbacks of term life insurance:
- Affordable coverage only lasts for a predetermined length of time versus a lifetime. If you buy a term policy for 30 years, once the term length is up, you can extend your coverage, but the premium will be significantly more.
- With a traditional term life insurance policy, there is no cash value that you can borrow against or is guaranteed to increase over time
- Like auto insurance, you only recoup your premium payments if something bad happens
Permanent Life Insurance
Permanent life insurance comes in a few varieties, but the most common are whole and universal. Unlike term life, permanent policies cover policyholders for a lifetime and offer a cash value component that can grow or decrease over time.
The cash value these policies build over time can be borrowed against to help pay the premiums, but loans and withdrawals will impact the total death benefit and cash value. Additionally, some permanent policies offer a guaranteed rate of return. Advocates for permanent policies say this is a more conservative, tax-advantaged approach (instead of buying term insurance and investing the rest) with the potential to earn more than the interest of a traditional savings vehicle, such as a savings account. These perks are why permanent policies can cost anywhere from 5 to 20 times more than a term life policy.
Because of the complexity, buyers should work with a financial professional to select and maintain a policy.
Cost of Whole Life Insurance and Other Permanent Policies
As mentioned above, permanent life insurance policies have significantly higher premiums than a term policy, which is why it’s important to purchase this type of life insurance when you’re young and healthy. Based on a sampling of online life insurance quotes, a whole life insurance policy for the same, very healthy 35-year-old man with a spouse and young children would likely cost:
Permanent life insurance might be the right choice if, beyond the primary need for insurance protection, you:
- Seek coverage that lasts a lifetime and won’t expire before you pass away
- Have maxed out tax-advantaged savings accounts
- Are seeking a product that offers a cash value component
- Have a high income and do not qualify for other types of tax-advantaged vehicles
- Are seeking flexibility with your life insurance coverage from financial protection for your family to being part of your estate planning strategies
Drawbacks of permanent life insurance:
- Premiums are high, which can leave people purchasing less life insurance than they really need in order to afford the monthly payments
- This type of coverage is much more complex to manage and requires the assistance of a financial professional or life insurance agent to purchase and maintain
- Critics say life insurance should not be used primarily for cash accumulation and that you could potentially see higher returns by investing the premium amount in the market
Both Could be the Right Answer
The best coverage could be a combination of both term and permanent life insurance policies. All life insurance is more affordable when you’re young and healthy, therefore, if purchased at the right time, both could be a cost effective way to cover all your needs.
For example, you could purchase a $100,000 whole life insurance policy that will serve as a lifetime benefit set aside for final expenses and your estate. Alongside that whole life policy, you could purchase a term life insurance policy that would cover your family during the time they are most dependent on your income.
For both types of life insurance, when shopping, it’s important to watch for:
- Guaranteed level premiums that remain the same for the duration of the policy (or for life)
- Ratings for the life insurance company. These matter because they indicate the financial strength and claims-paying ability of the insurer. We recommend choosing a company that’s rated Excellent (A) or better. MassMutual, issuer of our Haven Term policy, is rated Superior by A.M. Best (A++)**
Questions to Ask Yourself Before Choosing a Policy
Before you can decide whether term or whole life insurance is right for you, it’s important to identify your goals and what you want from a policy.
Here are a few questions to ask yourself as you move through the process:
How much can I afford to pay each month?
If affordability is your highest concern, then you can’t beat term life insurance. With the more expensive premiums that come with permanent life insurance, it can leave people buying too little coverage because it’s all they can afford.
How long do I want my life insurance coverage to last?
If you only need to pay for coverage while you have financial dependents and not enough wealth to protect them, then term life insurance will suit you well. If you’re looking for lifetime coverage, then permanent life insurance is a better option.
Do I want to build cash value I can borrow against?
Cash value is specific to permanent life insurance policies only. Term life insurance can’t be borrowed against unless you have an accelerated death benefit rider inherent to your policy in the event of the insured’s terminal illness (the Haven Term policy does.). This feature allows you to borrow against the policy amount if you have a terminal illness (subject to the conditions of the rider), to help pay bills that would be left to your family to cover after you’re gone. Of course, borrowing against the death benefit will lessen the value of the policy.
Am I comfortable with my life insurance policy being complex and one I can’t manage alone?
Permanent life insurance requires the assistance of a financial professional to select the type of permanent policy you will buy (whole or universal), the right coverage amount for your budget, and to purchase and manage.
How do I want to buy my policy?
Term life insurance is not only easy to select and manage but at Haven Life, it also can be purchased on your own time, entirely online.
Choosing the Right Coverage for The People You Love
At the end of the day, life insurance is all about protecting your loved ones and the right type of coverage is different for everyone. But, any kind of coverage is better than none at all.
A good way to figure out how much life insurance you need is by utilizing a free online life insurance calculator to help assess your financial situation. If you’ve decided that term life insurance is the way to go, from there, you can quickly get a free quote, apply online, and if approved, get your coverage started the same day.
If you’re interested in learning more about permanent life insurance, our parent company MassMutual has experienced life insurance agents who would be happy to assist in the process.
While it’s important to research policies and find the best one for your needs, you should try to not get so caught up in the details that you fail to buy a policy at all. What’s most important is that you’re taking the right steps toward getting the coverage you need to protect your family.
**MassMutual and its subsidiaries C.M. Life Insurance Company and MML Bay State Life Insurance Company are rated by A.M. Best Company as A++ (Superior; Top category of 15). The rating is as of February 15, 2017 and is subject to change. MassMutual has received other ratings from different rating agencies.