Why Permanent Life Insurance Isn’t Right for Most People

Permanent life insurance is typically more expensive and complex than what most of us need.

For people seeking financial security in case of an untimely death, there are two main types of life insurance: term and permanent. However, most people don’t require permanent life insurance.

Permanent life insurance might seem like a better option because it doesn’t expire as long as you pay your premiums. This may be why many buyers choose to purchase a permanent policy. LIMRA’s 2020 Insurance Barometer Study, a trade group in life insurance, showed that 51% of policyholders have only permanent coverage, and 33% have only term coverage.

Don’t let those numbers fool you if you are looking at a plan. Term life insurance, particularly for young, healthy people, is more affordable and less complex than permanent life insurance.

There are some situations where permanent life insurance is the right choice. These cases are rare compared to the common need for life insurance.

Comparison of the options: Permanent vs. Term life insurance

Life insurance is worth considering if there are people in your family who would be financially affected if you die suddenly. Insurers pay a death benefit upon your death to cover your debts, replace lost income, or pay for your children’s education.

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There are many types of term and permanent insurance. But the main categories are:

  • Term life insurance is only available for a limited time. Your death benefit expires once the plan ends. This policy will pay out only if your plan is still in force.
  • Permanent life insurance is available for your entire life. These policies are also a great investment vehicle. As you pay your premium, your plan accumulates a cash value that you can borrow from or withdraw money from.

Pros and cons of permanent life insurance

If you know that the money will be needed at any time, permanent life insurance is the best choice. A permanent life insurance policy can be a good option if you are certain you will have dependents for life, such as a child who has a disability or you want to help your heirs with large inheritance taxes, funeral costs, and other expenses.

There are also drawbacks.

Permanent life insurance can be more costly than term life. Whole life, the most common type of permanent coverage, can cost 10 to 18 times more than 20-year term coverage for a healthy applicant buying a $500,000 policy, a comparison of average life insurance rates shows.

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You may not be able afford sufficient permanent coverage to provide for your family’s needs. If you decide to purchase permanent life insurance, but can’t afford the monthly premiums, your policy could be cancelled and you may lose coverage upon your death.

Because of its investment component, permanent life insurance can be more complicated than term life. While your policy can build cash value, it can also be a costly way to save for retirement. You should look at other options before you consider insurance.

James Hunt, a life insurer actuary, advises the Consumer Federation of America. “It is especially important that young people take advantage of IRAs Roths and traditional 401 (k)s,” Hunt says. You shouldn’t purchase whole life insurance if you don’t have enough after maxing your IRAs.

Term life insurance is better than traditional term life insurance.

Many people will eventually “outgrow” life insurance once they have saved, paid off debts, and finished raising their children. This is what makes term insurance so appealing: It can provide coverage for as long as you need it. After that, you can reevaluate.

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The lower cost of term insurance is always a benefit. However, it’s particularly important during volatile times like a recession or pandemic when you may lose your job and be unable to pay high premiums.

Although term life does not have cash value, there are many policies that include “living benefits”, which allow you to withdraw cash under certain circumstances. Rootfin is an Austin-based insurance agency.

Root explained in an email that this option allows “you to access the death benefit while your still alive and pay out for cancer, heart attack or other qualifying events.”

Your policy should not pay out.

It’s okay to outlive your term insurance policy. Root stated that the goal of term life insurance is not to pay out. You don’t want your policy to end too early.

All this being said, you should choose the right life insurance plan for you. If permanent life insurance is what you prefer, you can get quotes online for term insurance.