Term Insurance is not the best, long term.

Written by Neil Lecky on Monday, 25 February 2013. Posted in Blog, Life Insurance

Term Insurance vs. Permanent Insurance

There are many reasons why one would seek life insurance coverage but if you have children or other dependents, life insurance should be a priority. Most of us understand the needs for having life insurance coverage, but what type of insurance would best suit you for your needs? When looking at options, applicants have been unable to avoid the debate over term vs. permanent insurance. It is important to choose wisely as the wrong type of coverage can have an big impact on your loved ones.

What is term insurance?

Term insurance is the most affordable way to buy insurance. As indicated by its name, term (temporary) insurance covers for a specific term. It is the less costly of the two types of insurance, but does not allow you to build cash value, and coverage will need to be renewed (if that option is available) or it will expire.

When is it appropriate?

Term insurance is an excellent option if you require insurance for a specific number of years. Term life insurance primarily protects against premature death, and it can also protect against certain debts with time constraints, such as a mortgage or to cover a child's education.

With most term policies the coverage is renewable but premiums generally increase to reflect your age at the end of the term, increasing company costs among other reasons.

With the increasing cost of term insurance you may want to opt for permanent insurance if your insurance needs are for at least 20 years. You more than likely have heard the saying, “buy term and invest the difference”. It really depends on how long you plan to keep your policy, because the cost of term can become much more expensive than permanent insurance in the long run. Premiums for permanent insurance generally remain level over the life of the policy.

Types of Term Policies available

  • Term 5, 10, 20, 25 and 30
  • Term to age 65
  • And other flexible term options.

What is permanent insurance?

Permanent insurance is a combination of a life policy offering death benefits and a savings called cash value in addition premiums remain level. If you live long enough, then you may get back much more than the contributions you made towards the policy by withdrawing funds or borrowing from it. The longer the policy is in force the higher the cash value will be. It usually takes a few years before the policy holders see any return and at least 20 years before you can get back more than what you've paid in should you cancel coverage.

As you might expect, the premiums for permanent insurance are more expensive than term at the time of application because the insurance companies average the cost of insurance over the years, taking into account increasing risks that come with age. Although permanent insurance is a very common form of life insurance, no one expects to be paying premiums until they die. At the time of retirement, some people begin using the accumulated cash value to supplement retirement income.

Types of Permanent Insurance

  • Term to Age 100
  • Whole Life
  • Universal Life

Limited pay options are also available for permanent insurance; you can for example pay it off in 10 or 20 years.

The following are a few questions that you should ask yourself when deciding on the type of insurance that will best suite your needs.

  • Who is being insured?
  • What is your budget?
  • How many years is the coverage required?
  • What is your life expectancy?

It is important to obtain the proper coverage at a young age. As you increase in age there are risks of not being insurable, increasing premiums and the possibility that some permanent guaranteed options will even be available in the future. If permanent insurance is the route for you but you cannot afford it, buy term insurance that can be converted at a later date, or even a possibly a combination of term and permanent. It is better to have some insurance than none at all.

Life Foundation has created a handy tool to help you decide on what type of insurance might be best for you. Give the Life Insurance Product Selector a try!


About the Author

Neil Lecky

Neil Lecky

Neil Lecky is a financial advisor with Alliance Financial Group. Neil specializes in Life Insurance, and segregated fund Investments for individuals, business owners and employees.

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