Term Insurance Versus Whole Life Insurance
Life insurance, for most people, is a necessary safety net for their loved ones. If you are not alive to help your dependents pay for funeral costs, mortgage payments, credit cards bills, college expenses and more, their standard of living is at serious risk. Life insurance helps fill the gap of the income that would go missing if you were gone. Most of our clients understand that need, however where it gets difficult is then figuring out which type of insurance is best for your needs.
There are two main types of insurance, term and permanent. Each of those then breaks down further, but for sake of simplicity, this article will speak in general terms about the two main types.
Term Life insurance
Term insurance is the simplest form of life insurance and is the most affordable; however, it has an end date. Depending on your age, 30 years is typically the longest policy length available. It is the purest form of life insurance and simply provides a death benefit to your beneficiaries if you die prematurely (before the term period is over). There are no other values assigned to the policy. Term life insurance policies typically are offered in 10, 20 and 30-year periods with a fixed cost (premium) during the same period. Regardless of the type of insurance, cost will be dependent on your health, if you smoke, your age and your gender. Women tend to pay less for insurance then men. It doesn’t offset wage inequality but a win nonetheless.
Things to consider:
- Choose a term period that matches your need. For most people that may match to their desired retirement year or the year that they expect their children to be independent. For example, if your youngest child is 10, a 20-year term started today would last until they are 30. Hopefully by that point they will not be financially dependent on you…hopefully.
- Choose a large enough death benefit. You will want to consider things like your lost income, whether you want to pay off certain debts like a mortgage, whether you want to cover potential college expenses, and the potential higher expense of things like child care in your absence. Add the categories that apply together to estimate your needed death benefit. Warning, the number may get very large. It is not uncommon to see death benefits in excess of $1,000,000. A rule of thumb is to have a death benefit at least equal to 10 times your salary. e
- Compare several insurance company’s rates. Make sure to compare apples to apples. Policy premiums are determined by your age, gender, health class, death benefit, and term length.
- Consider working with an advisor at SJK Wealth Management that can help determine these amounts with you.
Permanent Life Insurance
Permanent life insurance is more complex and typically costs more; however, it is guaranteed to last the rest of your life if premiums are paid. The most common form of permanent life insurance is called Whole Life Insurance, other types include universal, variable, and variable universal. With permanent insurance, your beneficiaries will receive a death benefit no matter when you die. Permanent policies also have an investment component known as cash value. Depending on the type of permanent policy, the cash value may have a guaranteed growth rate or fluctuate in the market. The cash value can be borrowed against or used to pay policy premiums but if you do not repay the loan it will reduce your death benefit and could jeopardize the policy. Some permanent policies can also provide dividends. The life insurance company pays these to policy holders in years they generate a surplus. They can be used to purchase more insurance, added to your cash value, or applied to your premiums.
Things to Consider:
- Will you eventually be self-insured? That is, have enough assets to cover your dependents needs when you die? For example, if you expect to have $2,000,000 in assets by the time you are 60 and $2,000,000 is enough to support your dependents if you would die. If this is the case, term insurance might be more appropriate.
- Do you have a lifelong dependent such as a child with special needs? In this case you may need a death benefit no matter how long you live. If this is the case, permanent may be more appropriate.
- Do you have a large estate? In 2017 if your assets are greater than $5.49 million or $10.98 million as a couple, permanent insurance might be used to offset federal estate taxes. Depending on the state you live, permanent insurance could also help offset estate and inheritance taxes.
- Your assets are illiquid and your beneficiaries will need cash at your death to help pay for expenses. For example, if you own significant property that cannot be sold easily. Your beneficiaries might be left with an estate tax bill and no cash to pay for it.
- You plan to spend all your investments through retirement and still want to leave an inheritance.
Sample Cost Comparison:
$1 million death benefit for a healthy Pennsylvania resident (annual premium)
|Policy Owner||Whole Life||30-year Term||20-year Term|
|Male, Age 30||$9,217||$703||$417|
|Female, Age 30||$8,150||$570||$343|
|Male, Age 40||$13,700||$1,281||$631|
|Female, Age 40||$11,677||$1,026||$534|
|Male, Age 50||$21,483||$3,301||$1,692|
|Female, Age 50||$17,760||$2,349||$1,233|
Average of three lowest quotes through LPL Insurance Associates.
This is a hypothetical example and is not representative of any specific investment. Charges will vary based on the circumstances of the insured life.
If you are considering life insurance we recommended speaking with an advisor at SJK Wealth Management that can help determine which type of policy best suites your needs. Additionally, we can help determine how much coverage is appropriate and which insurance company might be best for your personal situation. Call us today to discuss life insurance. 267-880-6116
Surrender charges vary by issue age, risk class and gender. Loans and partial withdrawals will decrease the death benefit and cash value and may be subject to policy limitations and income tax. A 10% federal tax penalty may also apply if the loan or withdrawal is taken prior to age 59½. All guarantees, including death benefits, are subject to the claims-paying ability of the issuing insurance company. An investment in variable life insurance involves risk, including possible loss of principal. Investment return and principal value of an investment will fluctuate so that shares, when redeemed, may be worth more or less than the original investment. Dividends are not guaranteed.