Life insurance options are an essential consideration when creating any comprehensive financial plan. Nevertheless, it can be easy to get confused while weighing various policies and options. Different policies cater to different needs and financial goals, and choosing the right policy is necessary in ensuring your loved ones receive the protection they need after you are gone.
Our insurance planning and wealth management experts in Salt Lake City have created this helpful guide for everyone interested in learning more about life insurance and which policy is the best option for them.
Term vs. Permanent
There are two basic types of life insurance: term and permanent. Permanent does not have a set expiration date and often lasts throughout your whole life, whereas term typically lasts for a specific time period. Let’s break down the differences between these two types of coverage.
1. Length of Coverage
As stated previously, a permanent life insurance policy lasts your whole life as long as you adequately fund the policy over time. On the other hand, term policies last for a pre-set, specific time frame. Most term policies last somewhere between 10 and 30 years, although other coverage periods are possible as well. When your coverage expires, your premiums will shoot up, and it will typically not be worthwhile to keep the policy at that point.
If affordability is your biggest determining factor, you will find that term insurance is considerably cheaper than permanent insurance. Most consumers do not have the cash flow to afford proper coverage using only permanent insurance. There are numerous kinds of permanent policies with a variety of features, so costs will vary, but in most scenarios, they will all be considerably more expensive than term insurance.
3. Cash Value
Perhaps the most important difference between these two types of life insurance is their capacity to build cash value. Term policies have no savings component; thus, they will only distribute benefits upon death. Unlike term policies, permanent policies have a savings component that allows you to build cash value. The more you pay into your plan, typically, the more its cash value grows. If needed, you can cash in or borrow against your permanent policy at any time.
What is right for me?
One thing to remember is that when you become financially independent, it means that you are self-insured. Keeping insurance past that point primarily serves to leave more money behind for heirs. Make sure to run the numbers between the death benefit amount and the amount you would leave behind if you invested those premium payments into something else.
While there is no one-size-fits-all solution, we find that sticking to term insurance is the most efficient route for most people. In cases like extremely high net worth or chronic health issues, permanent insurance can be the right route, but many people are still sold permanent policies that aren’t in their best interest.
If you are considering buying permanent life insurance, please consult with a disinterested third-party expert, perhaps even a fee-only financial planner at TrueNorth Wealth. Permanent policies can be extremely complex, and the high commissions that these policies pay can distort salesperson perspectives.
Most people need life insurance coverage at some point in their lives, so make sure your insurance plan is properly thought out by consulting with a fee-only advisor. At TrueNorth Wealth, we are insurance experts based out of Salt Lake City who do not sell insurance. As fiduciaries, we will give you impartial advice to make sure you are financially prepared for whatever life throws at you.
Contact us today to learn more.