Term policies are often sold as the cheaper life insurance option, but saving a dollar here and there isn’t always the best move. While term policies can work for some people, they have serious limitations and could essentially see you spending your money without getting anything in return. Here, we look at term life insurance policies, why they might not be a good match for you, and the alternatives available.
What is a term life insurance policy?
A term policy is the oldest form of life insurance on the market and was created all the way back in 1759. And before 1940, when permanent policies became a thing, it was also the only option available.
It gives you coverage for a set amount of time and pays out a death benefit to your named beneficiary should you pass away during the term. So it’s good news that your loved one gets a payout if you die, and you can rest assured that those most important to you are protected.
If you don’t die during the term policy (good times), then the coverage expires, and you no longer have life insurance. Because of this, term life insurance is more straightforward and cheaper than permanent options. That’s not necessarily a good thing, however.
What benefits does it come with?
Term life insurance might be the cheapest option, but it doesn’t feature any bells and whistles attached. If you die during the policy, your beneficiary gets a payout. Once the policy ends, however, that’s it. Finished. Done. Over.
Let’s say you bought a term policy and paid $50 into the premium every month for 25 years. Once it’s finished, and assuming that you’re still alive, you would have contributed $15,000 and received nothing in return.
It’s a lot of money to relinquish. And while it’s important to protect your family against unforeseen circumstances, there will always be that nagging thought in the back of your mind relating to the fact that you don’t get anything else other than basic coverage.
But the premiums are cheaper than other policies, right?
They are indeed cheaper, but even that isn’t straightforward. Your premiums are locked for the duration of the coverage. But if you decide to renew once it expires, you’ll be charged a new rate at your current age and health status.
What does that look like in practice? If you buy a term policy at 25-years-old for 25 years, you’ll pay the same rate each year. But if you wish to renew when you reach 50, you’ll need to pay premiums based on that of a 50-year-old.
Term life insurance might be cheaper, but it rarely works out that way in the long term and isn’t a particularly good investment if nothing bad happens to you. And obviously, the last thing you or your family wants is for something bad to happen.
Is there ever a time when term life insurance is a good idea?
For some people, a term policy works because they only want it for a set time and don’t plan to renew once it expires. This may be someone who recently had kids and wants to cover the family while they’re growing up. Then, when the children are adults and have flown the nest, the need for a life insurance policy isn’t as pressing.
But you could argue that even this approach is short-sighted. For starters, most kids go off to college when they leave home, and sending your children onto higher education certainly isn’t cheap.
On top of that, the premiums you pay equates to a lot of money over the duration if you don’t receive anything back. And that’s why, even with the best intentions, a term life insurance policy probably isn’t worth getting–especially if you’re also interested in saving for retirement.
Does that mean I shouldn’t get life insurance?
Hold on there. While a term policy might not totally stack up on paper, it doesn’t mean you shouldn’t get life insurance altogether. It’s just that you’re probably better off exploring alternative options, like a permanent life insurance policy.
Life insurance is important for Americans, as it gives your family financial protection should you pass away. It’s just that it would be nice if it did a bit more. And that’s exactly what a perm policy does, as it allows you to build wealth while you’re still alive.
Having the ability to accrue cash while you’re still alive changes the entire dynamic of life insurance and essentially gives you a form of investment account where you can set yourself up financially later in life. But just how does permanent life insurance work?
Getting permanent life insurance
Cost of Permanent Life Insurance
Let’s get the price out of the way first. A permanent life insurance policy is more expensive than term coverage. Where you might pay $30-$50 per month for a term, you’ll probably pay somewhere in the region of $80-$100 for permanent (of course, all life insurance premiums are dependent on how much coverage you get).
With a permanent life insurance policy, however, your premiums never increase. As a result, you pay the same amount each month throughout the entirety of the policy. Therefore, you can expect to pay the same at 65-years-old as you would at 25 if that’s the age when you got coverage.
Permanent life insurance lets you build wealth through its cash value. How does that work? Your monthly premiums cover two pots: the death benefit and cash value. Over the years, both of these increase (while your premium stays the same, remember?), and you can access the money you’ve accrued while you’re still alive.
You might decide to use it as a form of retirement income, or maybe you’ll use it to send the kids to college. The most important thing is that you have options and can make sound financial decisions while having the safety net of the death benefit in case you pass.
If one premium that never changes and the ability to build wealth wasn’t enough to get you excited, how about the fact that permanent life insurance is tax-free? When you withdraw the money accrued, you can do so in the form of a 0% loan to yourself.
And because you can’t give yourself tax, there’s no need to pay anything to the IRA. This separates permanent life insurance from other savings accounts like a 401(k) or brokerage account. When it comes to paying back the loan, your death benefit has it covered, with the remaining amount going to your beneficiary.
In conclusion: say goodbye to term and hello to perm
A term life insurance policy might be cheaper, but it’s not designed to let you maximize your money. When you get a perm policy, everything changes, and you can build wealth tax-free, enjoy a premium that never goes up and get a death benefit to protect your family.