Life Insurance: Term vs. Permanent – Part One

Life insurance is a complicated topic. There is a lot to take into consideration, even after you decide to purchase a policy. No one option is right for everyone. In this post, we will be examining term life insurance policies to help you determine if this is the best option for you.

BASIC TYPES OF LIFE INSURANCE

If you’ve already begun the research process, you’ve probably seen terms like “whole life coverage”, “universal life coverage”, and “variable life insurance” – just to name a few. This can get pretty confusing, so we’ll begin with the basics. There are two main groups of life insurance policies: term and permanent. In this post, we will be looking specifically at term policies.

TERM LIFE INSURANCE

Term policies are the simplest form of coverage. They are set for a specific range of time, which can be anywhere from 1 year to 30 years. If you die during this time period, the policy makes a single payment to your named beneficiary. If you do not die during this time period, the policy will expire with no payout. At that point, you will have the option to renew the policy for another term, convert it to permanent coverage, or simply let it expire.

Since age is one of the factors that determines the price of the premium, you should keep in mind that if you do choose to renew your policy, the premium will likely change. This is because people tend to have increased health risks as they age and may have developed preexisting conditions.

Different Types of Term Policies

There are a few subgroups within this category that you can choose from. The first is “level term life insurance”. This is the most commonly purchased type of term policy. It is considered the simplest and most affordable option for the average person. Premiums are determined by age, health, medical history, and various risk factors. Under this policy, the premium stays the same (level) for the entire term of the policy.

The second is “decreasing term life insurance”. Under this policy, you will pay the same premium amount each year that the policy is active, but the benefit is reduced over time. This works well for people who are seeking life insurance to cover a long-term debt like a mortgage, where the amount owed will also be decreasing over time. However, unlike a level term policy, decreasing term life insurance will not cover changing financial needs. It is also less affordable than a level policy.

The third subgroup is “annual renewable life insurance”. This policy functions similarly to other term policies except that the term lasts only one year. The policy must be renewed each year at a higher premium. Premiums for term life insurance policies are generally determined based on risk to the provider, or how likely it is that you will die during the term of your policy. This risk increases as you age, which explains why the premium will increase each year that you renew this policy. Because the premium is guaranteed to increase every year, you are most often going to be better off purchasing a traditional life insurance policy. Annual renewable insurance is only more beneficial in a few specific cases, such as if you cannot afford the premium of a traditional policy right away, or if you first need to improve your health or habits.

Term Life Insurance Positives

There are quite a few benefits to choosing a term life insurance policy. First, because the policy offers only a one-time benefit, there is limited risk to the consumer, which means the policy will cost less than most permanent policies. These policies are also easier to obtain and allow for adjustment to the amount of the benefit based on what you choose to purchase.

Who benefits most from term policies?

These are great for people with dependents who only need coverage while they are minors as well as people who want to cover a specific debt for a specific period of time. For example, I took out a 10-year, $100,000 term life insurance policy when I went away to college to cover the cost of my student loans. This was because my parents were the co-signers on my loans and, should something terrible happen to me, they would have struggled to pay off my debts while also helping my three younger siblings through school.

For $20 a month, I have had the benefit of knowing that if I were to die unexpectedly, my parents would not be saddled with a large amount of debt. Now that I am out of school and my loans are paid off, when my policy times out in 5 years, I will be able to choose whether or not to renew or let it lapse, based on where I am at in my life.

SO, HOW DO YOU KNOW WHICH POLICY IS BEST FOR YOU?

There is a lot of information out there about various life insurance policies. They each have different qualities, costs, and implications. Before making any decisions, you may want to consult a fiduciary financial planner. Fiduciaries are legally obligated to work in your best interest, which means they will undertake a thorough examination of your goals and current financial situation before making any recommendations.

Here at San Diego-based Rowling & Associates, we are fiduciaries who offer life insurance analysis as a part of our financial planning process. Although we can review other types of policies, we typically prefer term life insurance for a few reasons. For one thing, these policies tend to have the most affordable premiums. Also, this is considered “pure” insurance because its only purpose is to provide a death benefit to your named beneficiary. There are fewer variables with term policies, making them much more straightforward for the policyholder.

Of course, at the end of the day, your choice of insurance is entirely up to you and your preferences! Hopefully, this article has given you some good information to consider as you make this very important decision. If, after reading, you’re still not sure if term life insurance is for you, stay tuned for our next blog post on permanent life insurance policies. You can also contact our planners if you are interested in life insurance analysis.