Weighing the Costs: Permanent vs. Term Life Insurance

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If you are the sole provider for family or loved ones, you may be looking into life insurance policies as a way to provide for those who depend on you in the case of your untimely passing.

Before you begin the process, it’s important that you understand the differences between the two main types of life insurance as your make a decision.

Term life insurance

Like the name implies, provides coverage for a limited amount of time, or a term. For this type of policy, you pay fixed premiums over the duration of the term of the policy. These policies are designed to abate the risk of your untimely passing during a period of designated time. If you take out a 20-year policy for one million dollars, for example, and you pass some time while the policy is in place, then the amount will be paid to your beneficiaries. Usually, policy holders outlive the designated term of their life insurance policy, but, in the meantime, policies like these can offer a financial cushion to your wealth should you pass prematurely, helping to provide and care for your loved ones after you are gone.

Permanent life insurance

On the other hand, has much higher premiums, but it is term-less, meaning that when you die, your designated beneficiaries will receive a pay out from the policy. These types of policies also have a tax-privileged savings aspect, meaning that a portion of the premium you pay is set aside to grow for the future. You may also borrow against funds in a permanent life insurance policy if you need them to buy a house or pay for your child’s college tuition, for example.

So, what’s most financially advantageous choice here?

In short, it depends on your financial situation. If you are maxing contributions to your IRA and 401(k) every month and you have a healthy emergency fund, along with a diverse and thriving investment portfolio, and can afford the high premiums, then a permanent life insurance policy might be a good choice for you. But chances are, for most, a term life insurance plan will do the trick. This option will allow you to keep more funds flexible and available for savings and investments, while still curtailing the risk of your passing during the designated period of time. And, in most cases, if the policyholder outlives the term, the amount that would have been paid out upon death becomes obsolete because the holder has accumulated wealth by other means over of the duration of the policy.