Why buy term?
Term life insurance gives you the maximum protection for the lowest cost over a period like 10, 20, or 30 years. When you have children and a mortgage, that’s the ideal way to create an estate for the unfulfilled dreams and obligations you’ll leave behind when you pass away.
But term life insurance has a few drawbacks, such as:
- Premiums jump dramatically if you need to renew coverage beyond the initial term, which makes ongoing affordability difficult if you underestimate the correct term for you;
- Your coverage gets cancelled if you don’t pay your premiums;
- Your coverage expires at age 80 or 85 when many people are still alive; and
- You pay thousands of dollars in premiums but never have a claim.
Why buy perm?
Permanent life insurance lasts as long as you live, which is ideal for estate planning. Premiums, which are guaranteed and stay the same for life, are available with term 100 and some universal life insurance plans. Whole life and universal life insurance allow tax-sheltered growth, which can give you the flexibility to stop paying premiums (by taking a so-called premium holiday) as long as savings remain in the plan.
Permanent life insurance costs more than term life in the beginning but it’s less expensive later. The main drawback is the cost at the start. You may not be able to afford the amount of coverage you want. Getting some permanent insurance now will save you money overall because your premiums will cost more if you buy when you’re older. The costs are even higher if your health changes.
Why buy both?
Your needs change with each phase in life. The disadvantages of perm are the advantages of term, and vice versa. Having both gives you more flexibility. You can start with an affordable base amount of permanent life insurance. Next, add term riders to match obligations which will eventually end, like a mortgage.
Each separate policy has administration charges. Combining perm and term in one contract saves you money.
The bottom line
If your finances prevent you from getting permanent life insurance now, you could start by purchasing term life. Later, you can convert some or all of this term coverage to permanent coverage without proof of health. This guarantees that you can have the best of both worlds.
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- 5 Reasons Term Life Insurance is Better Than Permanent Insurance
- When Can I Cancel my Life Insurance?
- 9 Life Insurance Mistakes to Avoid
Flickr: David Hilowitz