Should I Buy Term or Permanent Life Insurance?

If your loved ones depend on you for financial support, you need to properly prepare for when you’re no longer living. One of the easiest ways to accomplish this is through life insurance.

However, choosing the right type of life insurance is sometimes challenging: especially since an infinite number of policy options (and countless features therein) are available in the marketplace.

In this post, we’ll review your life insurance options to help you decide which is best suited for you.

Types of life insurance

There are two primary life insurance categories: term and permanent life insurance.
Term life insurance is the simplest, most affordable form of life insurance, lasting for a specific amount of time—often up to 30 years—and typically paying your designated beneficiary only if death occurs during this term (your beneficiary will not receive any benefit should you outlive the policy). The death benefit is paid out as a lump sum, a monthly benefit, or an annuity.

Alternatively, permanent life insurance is an umbrella term for life insurance policies that don’t expire: meaning they’ll pay out regardless of when you die. These policies also often feature a savings component—funded by a portion of your premiums—that allows you to build or “accrue” cash value and access funds while you’re still alive. Due to these features, permanent life insurance policies are generally much more expensive than their term counterparts.

Permanent life insurance variations

The permanent life insurance category features several options including whole life, universal life, variable life, and variable universal life insurance policies.

Whole life is the most common type of permanent life insurance policy, offering a guaranteed death benefit irrespective of when you die and premiums that remain fixed. They also boast a cash value component—funded from a portion of your premium payments—that often offers a guaranteed rate of return.

Universal life policies (also called “adjustable life insurance”) offer more flexibility than whole life policies, as they allow you to raise or lower your premium payments (within certain limits) and change your death benefit as circumstances evolve.

For example, you can sometimes apply money accumulated in the savings component of the account toward your premiums (assuming there is enough money in the account). You can also slash your premiums by reducing your death benefit or, alternatively, increase your death benefit by boosting your premiums: thus avoiding the need to purchase a new policy. The savings component within these types of accounts generally earns a money market rate of interest.

Rather than pay policyholders the same, some universal life policies tie the cash value component to the performance of a stock market index such as the S&P 500 or NASDAQ 100. These policies are referred to as indexed universal life insurance policies.

Elsewhere, guaranteed universal life insurance (GUL) policies behave similarly to term policies in that the term ends at whatever age the policy matures. However, they do allow you to select coverage up to any age you specify rather than a specific term of 15, 20, or 30 years. While GUL policies generally offer a cash value component, they aren’t designed to build cash value; therefore, they won’t generate enough of a return to represent a worthwhile savings option. As a result, these types of policies are typically the least expensive form of permanent life insurance.

Variable life insurance policies resemble whole life policies but differ in that you can decide how you want to invest the cash value component of your policy. A variety of options—including stocks, bonds, and money market mutual funds—can help increase (or reduce) the value of the savings component within your policy. With variable universal life insurance policies, you’ll enjoy the features of both a variable and universal life policy (as the name implies).

Life insurance cost

The primary factors that determine the cost of your premiums are the coverage amount, term length, and life expectancy (the younger you are, the less expensive the policy). Other determinants include your gender (men pay more than women due to their shorter average life expectancy), smoking status, and your health, occupation, and lifestyle.

Now, let’s run through some specific numbers based on age and gender. According to ValuePenguin.com, a $500,000 term life insurance policy with a 20-year term would cost a 30-year-old male, on average, $33 a month. For a female, that number drops to $28. Forty-year-old men would pay $50 versus $41 for women, and the average premium is $118 and $92, respectively, for 50 year olds.

Permanent life insurance is generally much more expensive. For the same $500,000 coverage, GUL monthly rates (to age 90) can cost 30-year-old females $128.14 and males $155.99 based on rates published by JCR Insurance Group. For 40-year-old females, average premiums increase to $191.08 and then to $227 for males. $278.52 and $310.32 round out monthly averages for 50 year olds.

According to Nerdwallet.com, the lowest monthly rate on a $500,000 whole life policy for 30-year-old women is approximately $266 ($300 for men). Premiums average $402 and $451 for 40 year olds and increase to $627 and $703 for 50 year olds. Universal life policies tend to be less expensive than whole life but are still much more expensive than term life insurance.

Other life insurance considerations

One way to protect loved ones is by adding an accelerated death benefit rider to your insurance policy. While most common for permanent life insurance policies, some insurers also offer them for term policies. They are sometimes added to policies at no extra cost.

More specifically, an accelerated death benefit rider is a provision in your policy that enables you to receive benefits (sometimes called “living benefits”) while you’re alive but deemed terminally, critically, or chronically ill. These can help offset financial stressors on you and your family, but know that any benefit paid for these riders will ultimately reduce your death benefit payout.

There are also long-term care riders that allow you to pay for related expenses, also triggered for individuals who need help with two or more “activities of daily living” (ADLs). These are often the most expensive riders added to a policy.

Life insurance is sometimes also an efficient wealth transfer method, as death benefits paid are typically income tax-free and possibly estate tax-free if structured correctly. This is especially true when estates include illiquid assets: such as a family business that must be passed on. If your heirs are not expected to become involved in your family business, a life insurance death benefit can play a significant role as an equalizing transfer of wealth.

How to choose between term and permanent life insurance

Term policies are a great option if you need coverage and are seeking the most affordable premiums. You should also consider a term policy if you need coverage for a specific period of time: such as when paying off a mortgage, putting kids through college, shouldering costs for a wedding, or replacing income.

If you can afford corresponding premiums, permanent life insurance policies are best suited for those seeking coverage for a longer duration or for as long as they live. Because they offer various features, permanent policies are also sometimes desirable for those who would appreciate the flexibility of adding these. Beyond this, permanent life insurance policies are often viable options for people looking to further diversify a large investment portfolio via their life insurance policy.

Options for when you still can’t decide

If you’re still uncertain of which type of policy you’ll need, know that a convertible term life insurance policy may make sense as it provides a permanent policy conversion option. Since your permanent policy is predicated on your original health rating, you wouldn’t need to requalify.

Alternatively, you can enjoy added flexibility with some permanent life policies that allow you to add a term rider during years when you have greater financial obligations.

Finally, if you’re still unsure, remember you can always employ both types of policies.

In sum: term vs. whole life insurance

Choosing between term and permanent life insurance policies ultimately comes down to your objectives. However, since most of your larger financial obligations will likely subside over time and their premiums are much lower, term life insurance policies are sufficient for most people.

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Vision Retirement is an independent registered advisor (RIA) firm headquartered in Ridgewood, New Jersey. Launched in 2006 to better help people prepare for retirement and feel more confident in their decision-making, our firm’s mission is to provide clients with clarity and guidance so they can enjoy a comfortable and stress-free retirement. To schedule a no-obligation consultation with one of our financial advisors, please click here.

Disclosures:
This document is a summary only and is not intended to provide specific advice or recommendations for any individual or business. 

Variable Universal Life Insurance/Variable Life Insurance policies are subject to substantial fees and charges.  Policy values will fluctuate and are subject to market risk and to possible loss of principal.  Guarantees are based on the claims-paying ability of the issuer. 

Both loans and withdrawals from a permanent life insurance policy may be subject to penalties and fees and, along with any accrued loan interest, will reduce the policy’s account value and death benefit.  Withdrawals are taxed only to the extent that they exceed the policy owner’s cost basis in the policy and usually loans are free from current federal taxation.  A policy loan could result in tax consequences if the policy lapses or is surrendered while a loan is outstanding.