Is permanent life insurance a good idea for you?

Purchasing a life insurance plan is a common consideration for adults of all ages but confusion often arises when choosing between permanent and term life insurance. According to the Insurance Information Institute, approximately 60% of adults in the United States have a form of life insurance coverage. LIMRA’s 2020 Insurance Barometer Study estimates that approximately half of all life insurance policyholders in the U.S. possess permanent coverage, while approximately one-third only possess term coverage.

Permanent and term life insurance are separate policies, each with its own pros and cons. While permanent life insurance may be ideal for one person, a term life insurance policy may be the more practical option for another. Here are a few important details that all adults should know when choosing between these two types of life insurance.

What’s the difference between term and permanent life insurance?

Both term and permanent life insurance policies are designed to provide your loved ones with financial security in the event of your early or unexpected death. One of the most significant differences between these two policies is the length of coverage. Term life insurance only covers a select period of time, which could be between 10 and 30 years. Once that period ends, the policy expires. Permanent life insurance policies, however, do not expire within a set period of time.

Another major difference between these two policies is the payout method. When a term life insurance policyholder dies, their policy is paid out to their beneficiaries. And although a permanent life insurance plan pays out when the policyholder dies as well, these policies also accumulate a cash value account which can be withdrawn or borrowed against prior to the policyholder’s death.

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Pros and cons of permanent life insurance

Permanent life insurance is a popular policy that provides unique benefits. However, certain elements of the policy may not be advantageous for some policyholders.

Pros:

• There are multiple types of permanent life insurance policies, each of which has unique cash flow growth and different premium rates. These options include whole life insurance, variable life insurance, universal life insurance, indexed universal life insurance, variable universal life insurance and guaranteed universal life insurance.
• Because a permanent life insurance policy does not expire after a set time period, you won’t have to worry about renewing your policy throughout your lifetime.
• The cash value that you accumulate in your policy can be borrowed tax-free or withdrawn to use as supplemental income.

Cons:

• Though you can usually upgrade from term life insurance to permanent life insurance, you cannot convert from permanent coverage to term coverage if your needs change.
• You could lose your permanent policy via missed payments, which means you’d need to take out a brand-new one.
• Permanent life insurance will often cost more than term life insurance.

How much does permanent life insurance cost?

Permanent life insurance rates will vary depending on factors such as your lifestyle, health, age and the amount of insurance purchased. Along with your premium, your policy will also include a number of other charges such as fund management and administrative fees. Generally speaking, the total costs for a permanent policy can be more than ten times the amount of a term policy.

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When to choose permanent life insurance

A permanent life insurance policy may be a practical choice for adults who are caring for a lifelong dependent, such as a child with disabilities. It could also be a wise option for individuals who want to use the cash value accrual as supplementary income later in life.

When to choose term life insurance

Although some research shows that most adults have a permanent life insurance policy, term life insurance policies can be more beneficial for the average adult. Adults who desire lower monthly premiums for a policy that meets unique needs should consider a term policy, especially if it can be renewed or converted into a permanent policy later.

Bottom line

Permanent life insurance can be a better alternative to term life insurance for some individuals with unique needs. As you compare policies, assess the financial needs of your family or dependents, determine which premium amount you can comfortably afford and consider how your life insurance needs may change over the next few decades.

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