There are many types of life insurance coverage out there — the purpose being to provide shoppers with more options so they can find coverage that suits their individual needs. These different forms of coverage come in varying face amounts, lengths of coverage and price points. It can be overcomplicated.
To keep it simple, there are two main types of life insurance: term and permanent.
Term life insurance is characterized by its set term length of coverage — 10, 15, 20 or 30 years — and is usually one of the simplest to understand, purchase, and manage. It’s also affordable for most people. For example, a 30-year, $500,000 policy would cover a healthy 35-year-old woman until she’s 65 for about $38 per month.
With permanent policies, you have two common varieties are: whole life and universal life. These types of policies offer coverage for a lifetime and are characterized by a cash value component (thanks for staying with us) that can grow over time. These types of policies can cost 10 to 20 times more than a term life insurance policy depending on the term length you choose. Take that same woman above. A whole life insurance policy that would offer her coverage for a lifetime with a $500,000 face amount would start at about $512 per month.
The price of permanent policies can be cost prohibitive or require people to purchase less coverage in order to have a more affordable premium pricing. However, for those who want lifetime coverage and can afford the higher premiums, cash value policies can accumulate money that can be used however you want.
What exactly is cash value and how can you use it?
While the death benefit of permanent policy can protect your family financially if you were to die (by helping to replace your income, for example), the cash value of a permanent policy accumulates as premiums are paid. You are able to borrow or withdraw some of this growth and use it for any purpose – such as for paying premiums, college or supplementing retirement. Keep in mind that: loans and withdrawals can impact the total death benefit paid to your beneficiaries and the total cash value of the policy, can increase the possibility that the policy will lapse, and may result in a tax bill if the policy terminates before the policyholder’s death.
The idea of building up cash value in a life insurance policy can be an attractive feature to some because it means you have something tangible to show for your premiums. However, as previously mentioned, these types of policies can be cost prohibitive because of the significant monthly premiums.
Term versus permanent life insurance: which is the right choice for you?
When deciding if a cash value policy is right for you, ultimately you’re making a decision on whether to purchase term or permanent life insurance. And, depending on your financial situations, the answer could be both.
Term life insurance might be the right choice if you:
- Are looking for a low-cost option for financially protecting your spouse and children
- 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
- Financially agree with term life advocates on the “buy term and invest the rest” strategy
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
- Can afford 3-figure premium payments on a monthly basis
Buying life insurance to financially protect your loved ones
When shopping for life insurance, don’t let the seemingly countless options distract you from the core purpose: to financially protect the most important people in your life. The proceeds from a life insurance policy can help your family continue to meet ongoing financial obligations like the mortgage, shared debts, childcare, schooling, and the many other day-to-day bills we all have. This is the case with any type of life insurance — term or permanent.
The right coverage for you will fit into your budget and will provide you with dependable coverage while your loved ones need it most.
Nikolas Jintri is a writer and educator who teaches at Temple University in Philadelphia.