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What is the Difference Between Term and Permanent Life Insurance?

What is the Difference Between Term and Permanent Life Insurance?

| February 12, 2024

Recent data from the American Council of Life Insurers indicates that many individuals are underinsured, with the average coverage amounting to $183,780, roughly equivalent to 3.5 years of income replacement. This falls short of the recommended 7-year threshold, highlighting a significant gap in coverage for many households. Additionally, nearly half of consumers expressed concerns about the immediate financial impact if the primary wage earner were to pass away suddenly.

Understanding the distinction between term and permanent insurance is paramount in navigating life insurance options. Let's delve into both options.

Term versus Permanent

Term life insurance provides coverage for a set period, usually 10, 20, or 30 years, without building cash value. Beneficiaries receive a death benefit if the policyholder passes away during this period. However, once the term is over, the coverage stops. One of its primary advantages is affordability, particularly for younger purchasers, potentially freeing up finances for other household needs.

In contrast, permanent life insurance stays active as long as premiums are consistently paid, and it accumulates cash value gradually. While this cash reserve offers a modest rate of return, access to funds may be restricted.

Choosing the Right Option

Term life insurance can serve as a cost-effective solution for addressing immediate financial obligations, such as funding children's education. In contrast, permanent life insurance is better suited for long-term financial planning, such as estate considerations.

Many individuals find combining both types beneficial, with a foundational permanent policy supplemented by term coverage to address short-term needs. An individualized evaluation of your financial circumstances can guide you in selecting the most suitable insurance coverage. Factors such as age, health status, and the desired coverage amount play a significant role in determining the cost and accessibility of life insurance options.

 Additionally, policyholders should be aware of associated expenses and potential tax implications. Assessing insurability before implementing a life insurance strategy is advisable so budgeting can be taken into account to assess affordability.

Term or Permanent?

While permanent life insurance policies saw increased popularity in 2021, term policies still account for approximately 74% of total coverage. This underscores the continued relevance and appeal of term insurance for many individuals. All clients have individualized needs, so we encourage you to contact us to review your life insurance policies. PHP Capital is insurance licensed in CO, DE, FL, MD, PA, and NC.

 

Sources:

American Council of Life Insurers (ACLI), 2022

Bureau of Labor Statistics (BLS), 2022

LIMRA, 2022