For most people, the primary goal of life insurance is to protect your family in case the unexpected happens. Choosing the right type of life insurance depends on your needs and your budget.
But the right product today may not still suit your needs 10 or 20 years from now.
That’s why it is important to choose an insurance policy that allows the greatest amount of flexibility.
COMPARING TERM LIFE AND PERMANENT LIFE INSURANCE
There are two basic types of life insurance: Term and permanent.
Term life insurance is temporary, providing coverage for a specified period of time—10, 20 or maybe 30 years. This helps keep the cost low, but it provides only a death benefit. Such policies can be good if you are insuring for a particular time-specific need, such as:
- Covering a mortgage. It’s not advisable to take on a mortgage without life insurance to cover the payments if something should happen. Penn Mutual offers a 30-year level term period on all our term products.
- Covering a child’s college education. If you plan on paying for your child’s college or other education by using income you’ll earn during their college years, you may want insurance in place only while they’re in college. Or, you might want cheap coverage that will pay off any student loans you co-sign, but you may not want to continue coverage after the loans are paid off. Either way, term insurance functions to cover a specific period.
- Covering a short-term business need. For example, your business might need short-term bank financing to fulfill a large new contract. Many times, a lender in these cases will insist on a life insurance policy on the business owner. You may want only the barest, minimum-cost term coverage to meet the requirements of the lender.
In contrast, permanent life insurance provides coverage for your entire life as long you pay the premiums. In addition to the death benefit protection, your policy builds cash value you can access at any time, for any purpose. These “living benefits” of permanent life insurance can be used for literally anything you want — to help you start a business, fund a college education, supplement your retirement income, or, if you need it, pay for long-term care. Accessing your permanent life insurance policy’s cash value in this manner reduces the policy’s death benefit and values — but it offers you flexibility as your protection needs change. You have many types of permanent life insurance to choose from, and each type uses a different approach to calculating a policy’s cash value. Talk to your financial professional to learn how permanent life insurance is ideal for building or preserving a legacy.
SHOULD YOU BUY PERMANENT OR TERM LIFE INSURANCE?
While there is no one right answer, some experts suggest buying as much permanent insurance as you can afford, then using term life insurance to bring you up to the full amount of coverage you need for protection.
One analogy often used compares renting a house to buying one. Term insurance is like renting a house. The start-up costs are less, and there’s no long-term commitment, but you’re also not building equity. Permanent insurance is akin to buying a house. It’s more of a commitment, and while it might cost more at the outset, over the long run, you build up equity that you can tap for other purposes.
Whatever you do, it pays to consider how your needs might change over time. You might think you only need insurance until the mortgage is paid or the kids graduate from college, but what happens if you buy a new home or have more kids? If your term policy expires after the 10-, 20- or 30-year term, you may find that the premiums on any new policy will likely skyrocket, as you’re now 10, 20 or 30 years older. And what if your health changes during that time in a way that makes you uninsurable?
The key is to lock in your insurability while you are young and healthy, either by buying a permanent life insurance policy or a term policy that allows you to convert all or part of your coverage to a permanent policy, while retaining the same rate class.
You’ve probably seen that not all convertible term policies are the same, so be sure to take a close look at the details of the term conversion privileges.
THE ROLE OF NON-CONVERTIBLE TERM LIFE
Of course, there are circumstances where a non-convertible term policy might make sense. Perhaps you already have a mix of permanent and convertible term life insurance in place and only need short-term coverage for a specific purpose.
Penn Mutual also offers a non-convertible term policy to meet this need for economical temporary coverage. Like the rest of our portfolio, the product is backed by the long history of Penn Mutual, and offers many of the features and riders available on our other term products, but it can’t be converted to permanent coverage.
For most circumstances, however, people can think more broadly about the role insurance might play in their lives. Insurance is typically purchased because the future is uncertain, and a convertible term or permanent life insurance policy protects your future flexibility.
This post is for informational purposes only and should not be considered as specific financial, legal or tax advice. Depending on your individual circumstances, the strategies discussed in this presentation may not be appropriate for you or your client’s situation. The information in this material is not intended as tax or legal advice. Always consult your legal or tax professionals for specific information regarding your individual situation.