Permanent vs. Term Life Insurance: Which Type of Coverage Do I Need

The New Year has arrived, and this is often a good time to evaluate your insurance policies to determine if you have the appropriate amount of coverage for this stage in your life. One important area that is often overlooked when assessing insurance coverage is life insurance. Many of us purchase a policy when we are younger, then set the premiums on autopay and forget about it. Others obtain temporary life insurance through work and lose it when they switch jobs, and still others do not have any coverage at all.

If you are an adult, you should have at least the minimal amount of coverage for funeral and burial expenses, roughly $15,000 to $20,000. And if you have financial obligations and others that depend on you, your coverages should be much higher. The type of insurance you should carry depends on several individual factors such as your income, debts, number of dependents, and financial wherewithal.

Term vs. Permanent Life Insurance: There are several important differences between permanent and term life insurance. Term insurance is much cheaper than the permanent variety, allowing you to purchase higher levels of coverage for a fraction of the cost. On the other hand, term policies have an expiration date. For example, a typical policy might expire in 5, 10 or 20 years. This means that at the end of the term, the coverage is no longer in effect.

Permanent life insurance costs much more than term, but that is because you are purchasing a financial asset that accumulates cash value over time. As long as you pay the premiums, the coverage remains in force and the policy grows in value. In the future, if you no longer need the policy, it can be cashed out, and while the policy is active, you can take out loans against it in the event of a financial hardship.

The decision on whether to buy term or permanent life insurance will depend on your financial capability and what you want to use the policy for. For example, if you need a large amount of coverage (such as $500,000 or $1 million) to leave your spouse and children if you should pass away while you are working and your children are still minors, but you will not need the coverage once your kids become adults, then term life insurance might be the way to go. However, if you want your life insurance policy to be active permanently and/or you want it to double as a financial investment, permanent life insurance is worth looking into.

Finding the Right Life Insurance Policy: There are also numerous insurers that carry a wide range of life insurance product offerings. To find the right policy, it is better to shop around than to look at just one or two carriers. Rates vary widely between carriers, and if you get a quote only from the insurer that has your auto and/or homeowner’s policies, you may be missing an opportunity to get something better.

When shopping for life insurance, it is a good idea to speak with an independent insurance agent. Independent agents work with several of the top insurers in your state, and because they are not captive to one particular carrier, they can shop objectively and locate the life insurance policy that is the best fit for your specific circumstances.