4. Term vs Permanent Life Insurance

There are two broad types of life insurance – term and permanent.

 

Term 

Term insurance provides coverage for a specific period of time (e.g. 10, 20, or 30 years, or until age 65). For the period you choose, your payments and coverage will stay the same, guaranteed.

 

Permanent

Permanent insurance covers the insured for their whole life and will pay out at end of life, whenever that is. Premiums and coverage are guaranteed to stay the same for life.

 

Your Choice

To decide which type to buy, ask yourself the following questions:

  • Would I want an inflow of money at the end of my life, no matter when that is?
    • This could be because of a tax liability, legacy charitable giving, or funeral expenses.
  • Would my family/dependents only need an inflow of money if I were to pass away during a given period of time?
    • This period could be during your working years until retirement, or while a certain liability like a mortgage exists.

 

Term Insurance for Most Cases

Term insurance is typically much cheaper and for most people will be sufficient coverage. It may be sufficient because life insurance does not cover the risk of you dying, but the risk of financial loss resulting from your death. This is a small but important distinction and we’ll explain.

 

In retirement, when you no longer work, there is no need to replace any income because there is no longer any employment income. In addition, savings are generally sufficient at that point to cover your dependents’ needs. At this point, is there a financial risk of you dying? Typically, the answer is “no”, so the need for life insurance goes away. On the other hand, during your working years, premature death could have a huge financial impact. There will be many future expenses still to come and your household likely does not have sufficient savings built up. 

 

On our quotes page, you can directly see the price difference between term insurance and permanent life insurance. We believe that most people should be buying lower-cost term insurance.