The Differences Between Term and Permanent (Whole Life) Insurance
Term insurance can be best described as a temporary product. The length of time (term) for which you buy your insurance can vary. You can purchase term insurance from several companies and the terms range from 5 to 30 years. Many term insurance products expire between the age of 75 and 80. There is a product available called Term Life and it is available to age 100. The most important thing you will notice about most term products is how inexpensive they are compared to whole life. I will try to explain why this is and basically offer an opinion on which is best for each situation outlined. Remember that opinions are just that and you are advised to discuss this with a local insurance agent. Regulations vary by province and state, so you have to consult with the appropriate resource to get answers that are specific to your province or state.
Term Insurance in basic detail.
This product should be purchased to cover off a debt. A good example of term insurance is to cover the cost of your mortgage. Another good reason for term insurance is to cover off a large loan. Should something happen to you, your beneficiary would be able to use the term insurance to pay the mortgage on the house, or loan or they could pay part and keep the rest to decide on what they need to do next in life. Term insurance is less expensive because it doesn't always have to pay out. If you bought a product like a Term 10 (for ten years), the price is set for ten years, but after ten years the price increases quite dramatically. Sometimes the price increases so much that the client is unable to afford the monthly premium, thus the contract ends and the insurance is no longer in place. The same thing can happen with Term 20 (20 year fixed cost). The price at the end of twenty years will be likely at least five times greater than the original monthly premium, so it too becomes unaffordable and it expires. Many of the term products cease to cover after 80 years of age, so you are no longer insured at that age. You have paid term insurance all of your life and at 81 years old you have no insurance. These are great products for temporary debt, however if you are looking to buy insurance to pay burial/cremation costs you need something affordable and permanent.
Permanent Insurance is a lot different. These are policies that are set up to cover final expenses and possibly leave something for those you leave behind. This part is equally complicated because there are so many products available. They are basically called whole life or universal life policies. This one has a price that can be set at the beginning and is designed for you to pay the same price monthly until the policy is paid up in full. It can be paid for life or there are other options where you can have it paid in full in twenty years. This type of insurance is much more costly. You may wonder why, but it is as simple as this. If you pay the higher premiums for the whole life or universal life product, the insurance company knows that they are going to have to pay the face value of the policy some day. It will not expire at the end of a term. It will not expire at a certain age. Regardless of how long you live, the insurance company will pay the face amount of the policy in full in accordance with the contract you signed. Insurance companies know this and they set the monthly premiums to reflect that cost. Thus permanent insurance is more expensive of the two options. There is an upside and that is that you know for sure, if you continue to pay your monthly premium, that your beneficiary will collect the money when you die. Another good thing associated with permanent insurance is that they build cash as they mature. Thus you have an added extra security as a cash value within a life insurance policy which increases with the age of the policy. Permanent insurance is a good product, but it is out of price range for some people, so the trick is to keep the face amount (payout) reasonable. You could have a small universal/whole life policy that could cover the cost of your funeral and leave a little for your family. I recommend at least 25 thousand in a permanent life policy.
Can you have the best of both worlds?
The answer in unequivocally yes. In my opinion, depending on your situation, you should have a 25k-50k permanent policy and add a twenty year term rider for you mortgage or other needs related to early demise. The term product can vary from 100k to 900k, depending on your personal financial situation and needs. Thus, you are putting money into a permanent product that will pay for your final expenses and you have term insurance to cover your mortgage or the cost for daycare while a one parent family works should something happen.
The bottom line, in my opinion, is that it is important to have insurance and the amount of insurance you have should always be within the range of what you are able to afford. Good luck in your quest and I am hopeful that the information here has helped you understand a difficult subject. I did not mention anything about health, but that I will leave for another day. Health status is another critical component to buying life insurance the healthier you are, the less costly it is, in most cases, but age is also a factor. It is important to buy your insurance while you are young and healthy because it is less expensive and life insurance does increase in cost with age. Good luck as you move forward in the quest to protect your family.