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What types of Life Insurance are there?

Updated: Apr 20

There are two main types of Life Insurance. Term and Permanent.



Term Life Insurance


Term Life Insurance is one of the main types of life insurance which is intended to be the most affordable option to protect your loved ones or even business interests for a certain time period (hence the use of the word term). This is also called Temporary Insurance. 



Within that time period, the premium amount is locked in and will not increase. It could range from 1 year up to 30+ years. (Example: 10-Year Term or 30-Year Term)



Pros and Cons of Term Life Insurance


Pros

  • More coverage for the money

  • Affordable and can fit almost any budget

  • Plain and simple

  • Convertible to a Permanent Policy (depending on the carrier)

  • Living benefits that allow you to access the death benefit coverage while your alive after a certain major medical conditions like cancer, heart attack or stroke. (Again, depending on the carrier)


Cons

  • It can expire after the term period ends which will increase the premium (potentially dramatically)

  • No cash value

  • Although a Return of Premium (ROP) could be an option but it could be 2X-3X the normal premium in order to add it to a policy



Permanent Life Insurance


Permanent Life Insurance is the second type of coverage which is intended to last a person's entire life. (This is assuming they pay their premiums or the policy is sufficiently funded and properly structured for the purposes important to them.)


It also is a lot like owning a house, the more money you put into it, the more equity you gain.

Just like Term, Permanent Life Insurance share the same tax advantages. They both share the benefit of a tax-free death benefit to their beneficiaries. 


But Permanent takes it a step further by adding a cash value account that is built into the policy. It is a lot like a savings account at a bank or credit union. The basic concept of it is that some of your premium covers the cost of the policy and the rest goes into this cash value account, and yes you can earn interest on it too!


Pros and Cons of Permanent Life Insurance:


Pros


  • Coverage lasts your entire life

  • Cash value that can be accessed through withdrawals or loans tax-free

  • Cash value may earn interest

  • More customizable to fit different needs

  • Tax-Free death benefit


Cons

  • Premiums are higher than term life insurance with the same coverage

  • More of a learning curve to have a good understanding



Do I have to choose one?


Something worth mentioning is that sometimes it makes sense for someone to do both Term and Permanent policies. Let me explain. 


On one hand, having only a term policy means you give up the benefits of having a permanent policy. 


On the other hand, having only a permanent policy would cost a lot more in premium than with a term policy.


So why choose one or the other, why not have best of both worlds? Something to consider!



Summary


Now you know how the two main types of life insurance compare and how they both have their pros and cons. It wasn't that bad right?

All in all, there is no real right or wrong answer for everyone when it comes to choosing the right coverage for you. It's not a one-size-fit-all. Work with a professional to is knowledgeable with both types so you can compare your options.





Have Questions?





*For education purposes only. This is not financial, legal or tax advice. Consult the appropriate professional before implementing a strategy to make sure you find the right solution for your specific needs.

**This is not an article that is intended to explain all the nitty-gritty details of how these two work, but just to give you a very basic understanding of the differences and their place within your financial strategy

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