According to industry experts, most people do not have adequate life insurance coverage. The American Council of Life Insurers recently reported that average coverage equals $197,000, this amount is equivalent to almost 3.5 years in terms of income replacement (with the median income being $59,540 in 2024, according to the Bureau of Labor Statistics). That’s only half the recommended 7-year threshold.Term and Permanent Insurance
Term life insurance provides a death benefit for a specific term, such as 10, 20, or 30 years. Unlike other types of life insurance, it does not accumulate cash value. If the policyholder dies during that term, their beneficiaries benefit from the policy. When the contract ends, so does the coverage.
This leads to term life insurance’s main advantage: price. Generally, term life insurance costs less than permanent life insurance, especially if the purchaser is younger. This has the potential to free up funds for other household expenses. Certain policy riders offer extra benefits to policyholders, such as a waiver of premium rider, which allows them to stop paying premiums and keep their life insurance policy in force, should they become disabled.
When it comes to permanent insurance, coverage remains in place as long as the policyholder makes payments. In addition, permanent policies are designed to build up “cash value,” a cash reserve that accumulates with the policy. Typically, this cash reserve pays a modest rate of return. However, the policyholder has limited access to the funds.
Which Should You Choose?
Term life insurance can be designed to protect against upcoming expenses, such as putting children through college. Permanent life insurance, on the other hand, can be more useful for covering long-term financial needs, such as estate planning.
Several factors will affect the cost and availability of life insurance, including age, health, and the type and amount of insurance purchased. Life insurance policies have expenses, including mortality and other charges. If a policy is surrendered prematurely, the policyholder may also pay surrender charges and have income tax implications. Consider whether you are insurable before implementing a strategy involving life insurance. Any guarantees associated with a policy are dependent on the ability of the issuing insurance company to continue making claim payments.
Term or Perm? Why not both?
In 2022 people purchased more permanent life insurance policies than term life insurance policies. However, term policies account for approximately 71% of the face amount of the policies issued. Many people find that they have a combination of short- and long-term needs. In such circumstances, it may be prudent to have both types of insurance: a basic level of permanent life insurance supplemented by a term policy. A review of your situation may help determine what type of life insurance is appropriate.
Want to Learn More?
As always it is best to discuss these options with a licensed insurance professional. Inquiries are always welcome here at OFS Financial Services, we are simply a phone call away. Contact our office today!
Sources: ACLI.gov, 2023 | BLS.gov 2024 | LIMRA.com, 2023 | FMG Suite.com, 2024