Term versus Permanent

For most people, life insurance should be a key component of your end-of-life plans. It is hard enough to lose any loved one, but it’s especially difficult when it’s a spouse with whom you shared the responsibility to run a household and raise a family. Life insurance can play a huge role in easing the burden of death by allowing the surviving spouse to hire others to help with day-to-day tasks and/or replace lost income and keep paying the bills.

Like all insurance, life insurance is a risk/reward financial tool. Insurance providers risk having to pay out a large sum of money to a beneficiary if the covered individual dies during the term of the policy. The reward is the receipt of regular premium payments while the policy is active.

For the covered individual and the policy’s beneficiaries, it’s the opposite. The risk is paying premiums over the course of many years and not receiving anything for it. The “reward” is receiving a large, income-tax free sum of money (known as the “death benefit”) upon the death of the insured.

The typical format of the two main types of life insurance are described below. However, each has many different options, variables, and conditions that will determine the premiums and the payouts. Be prepared to read the fine print and ask a lot of questions to make sure you understand what you are receiving.

• Term – You pay a set premium for a certain number of years for a specific death benefit. Example: Pay $360 a year (or $30 a month) for 30 years for a $500,000 death benefit. If the insured dies before the 30 years expires, the beneficiary (spouse, kids, charity) receives a check for $500,000. At that point the policy is terminated, and the beneficiaries no longer have to continue paying the annual premium. If the insured is still living after the 30 years expires, then the policy ends and there is no payout.
  
  Pros: Low premiums. Simpler policy to understand.
  Cons: Coverage ends when the policy expires.
  

• Permanent – A permanent policy for the rest of your life (as long as you pay the premium) with a death benefit and a cash value. Part of the premium goes into a savings/investment account that can be used later in life. The premiums are higher because of the dual insurance and investment nature of the agreement. Example: Pay $4320 a year (or $360 a month) for life for a $500,000 death benefit. It can take time for the cash value to equal the premiums paid because in the early years the bulk of the premiums go towards covering the fees and costs of managing the policy rather than the cash value. For this example, if we assume a total of 1% return of all premiums paid after fees and costs, then the cash value of the policy would be about $151,000 after 30 years, $213,000 after 40, and $281,000 after 50.
  
  Pros: Can borrow from cash value when needed. Premiums won’t change.
  Cons: Higher premiums. Loans from cash value not repaid are deducted from death payout. Beneficiaries typically only receive the death benefit (not cash value) when the insured dies.

ACTION ITEM:

• If you don’t have life insurance, contact an agent to determine the best plan for your situation. Seek proposals from multiple agents to compare rates and benefits.

• If you already have life insurance, contact your agent to review the policy. Is it still the right type of policy for you? Is the policy enough to meet the needs of you family should the insured pass away?