When you’re shopping for life insurance, you may be confused as to whether you need term life insurance or permanent life insurance. And, if you’re asking yourself what the difference is between the two, don’t worry…you’re the norm, not the exception.
Here, what term life insurance is and what to consider before buying a policy.
What’s the difference between term and permanent life insurance?
Permanent and term life insurance both operate under the same principle: If you were to die, the beneficiary you name (for example, your spouse or children) will receive a payout (morbidly known in the industry as a ‘death benefit’). This payout can help them take care of financial obligations, such as childcare expenses, a mortgage, and funeral expenses.
Commonly, families tend to need this financial protection only for a finite period of time. For example, if a family has a mortgage and young children, a $1 million policy payout could help pay the remainder of the mortgage and help pay for childcare expenses. Fast forward 20 years, that same family might have paid down most of the mortgage and the children are probably independent…at that point, the life insurance protection is less critical for the family’s financial well being. This is a typical use case for term life insurance. Term life insurance provides coverage for a specified period of time – usually ten, twenty, or thirty years. If you die during that period of time, your policy will pay out to your beneficiaries. If you don’t die during the term of your policy, at the end of it, your coverage expires.
In contrast, permanent policies do not expire as long as the premium continues to be paid. Provided the policy remains active, there will be an eventual payout upon your death, whenever that may be. In addition, permanent policies may also offer a savings component which can allow tax-deferred earnings growth and can be used as a savings vehicle. The major downside to permanent policies is that permanent policies have significantly higher premiums than term policies.
When to consider a term life insurance policy
If you’re trying to decide which policy is best for you, it may be a good idea to consider your general life circumstances. While individual situations vary, term life insurance may be the best option for the following circumstances:
You have outstanding financial obligations that have a defined end date
If you’re looking to protect a specific financial obligation for a finite period of time, term insurance is probably the best fit. Whether you’re planning for a mortgage, future childcare expenses, or debt, a term life insurance policy can ensure that these obligations will be covered if you were to die. Since the premiums are affordable — with Mosaic Life, it’s possible to get a $1 million term policy for ~$1 a day — buying a term life insurance policy can give you peace of mind while still ensuring you have enough money left over to pay your bills.
You’re young and healthy
The cost of term life insurance depends a lot on your health and age, and when you’re young and healthy, you can lock in a rate for the length of the term. That means if you buy a 30-year-term policy at age 30, you’ll pay the exact same premium in your fifties as you will in your thirties.
You want more control over your investments
While the savings component of permanent life insurance policies can be attractive, it’s worth considering whether it makes more sense for you to take the difference in monthly premium between a term policy and a permanent policy and invest that in a separate investment account. Many people find that they prefer their money grow in an account they can control (and potentially with lower fees) rather than have that cash tied up in their permanent life insurance policy.
You’re actively saving for a future financial goal
Whether you’re saving for a house, planning to have kids, or focused on building an emergency fund or nest egg, the affordability of term life insurance can allow you to build your savings while still having peace of mind.
Your overall goal is life insurance coverage
If your overarching goal is to get insurance coverage as efficiently as possible, some term policies provide a very simple path to coverage. At Mosaic Life, for example, it’s possible to get coverage in as little as ten minutes, entirely online and with no medical exam. Permanent policies can sometimes require a more complex application process and may require more research to determine if the savings component of the plan is the best option for your future overall goals.
When a permanent life insurance policy may make sense
A term life insurance policy fits the financial goals and circumstances for most people. By the time the policy term ends, their mortgage will be paid off, their kids will be financially independent, and they will have saved a nest egg. While one’s death would still be devastating to family, it wouldn’t be as much of a financial blow at the end of the policy as it would be during it.
However, if you’re planning for a financial obligation that materializes upon death (e.g., estate tax) or are looking for tax planning strategies, consider a permanent policy. Of course, you can also look into both – a term policy for the obligations that have a defined end date, and a permanent one for obligations that last until death.
Make the right decision for your family
Regardless of the policy you choose, a commonality that exists between term and permanent life insurance is that premiums get more expensive the longer you wait. Coverage can give you and your family peace of mind. Making sure you know what you’re buying and how you and your family are covered are key questions to have answered before you purchase a policy. For many families, a term policy gives them the coverage they need at a price they can afford for exactly the amount of time they need it.
