Does Life Insurance Keep You Awake at Night? Here’s How to Sleep Soundly
You’ve heard for years that you need to get life insurance. It’s kept you awake at night, and you’ve decided it’s finally time to really do something about it. What type of insurance do you need, and how much?
Perhaps you’ve recently bought a house, and you suddenly have a large mortgage hanging over your head. The debt is several times what you make in a year, the monthly mortgage payment stretches far into the future, and there’s no way your spouse could afford it if you were to die.
Or maybe you’re expecting your first child, and you worry about protecting their future. If the worst were to happen and you were to die, would your new family be able to stay in their home, or pay for college?
Life insurance is primarily to protect your family in case the unexpected happens, and with permanent life insurance you can use the cash value accumulated during your own lifetime. 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, as your chances of dying at a younger age are relatively low. Term insurance 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. No one should take on a mortgage without life insurance to cover the payments if something should happen. Penn Mutual is now offering a 30-year level term period on all our term products. Previously, we offered only 10-, 15-, and 20-year level term policies. Advisers asked for policies that could be used by clients to cover a 30-year mortgage, and we answered.
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, the 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.
Permanent life insurance, on the other hand, provides coverage for your entire life as long as you pay the required premiums. Beyond the death benefit protection, it also builds up cash value, which can be accessed during your lifetime for any purpose — to start a business, fund a college education, provide money for your retirement, or even pay for long-term care. We call those the “living benefits” of permanent life insurance. 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 adviser 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, the general advice is to buy as much permanent insurance as you can afford, then use 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 terms of the conversion.
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 now offers a new non-convertible term policy to meet this need for economical temporary coverage. Like the rest of our portfolio, the product is backed by the 172-year 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, I urge people to 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. That may help you sleep more soundly at night.