Should you buy term or whole life insurance?

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Which is better? Term or whole life insurance?

Some financial experts advise people to go with term life insurance and invest money rather than buy a permanent policy. However, permanent life can be a better idea.

One reason some suggest term life is because it costs less. Plus, a permanent life policy’s investment rate can’t match the stock market.

There are benefits to permanent life, though. Permanent life once dominated the life insurance market. In recent decades, term life overtook permanent as a more favored choice.

LIMRA reported that 54% of Americans in 2020 have life insurance. That’s a decrease from 63% in 2011.

People are more slightly more likely to have a term life policy rather than permanent coverage. However, permanent life is going through a renaissance.

Why do people buy life insurance? Todd Silverhart, corporate vice president and director of LIMRA Market Research, said the three most common reasons people buy permanent coverage are:

Burial and final expenses
Replace income of wage earner
Transfer wealth to next generation

“Permanent insurance is appropriate when a buyer wants the coverage in force when they die, regardless of when that is,” said Silverhart. “That could be for final expenses, to support dependents, to leave a legacy — many reasons. Term life is appropriate when the need is temporary, such as until a mortgage is paid off or until children are grown.”

Let’s take a look at five reasons why permanent life insurance might be a better choice for you than term life insurance.

Different policies let you choose the one that suits you

Insurers offer various kinds of permanent life insurance. These choices include whole life, universal life and variable life.

The options differ by premiums and cash value:

Whole life — Typically has a fixed premium and spreads out the premiums across the length of your policy. Your cash value grows at a guaranteed rate.
Universal life — Sets up maximum and minimum premiums. You’re able to pay premiums between that amount and you can also use the policy’s cash value to pay the premiums.
Variable life — Charges set premiums or they can vary depending on the policy. You also choose how to invest the cash value based on the insurer’s options.
variable universal life insurance — A combination of variable and universal life insurance. You can vary your payments and coverage amount, and invest your policy premiums.

Which option is best depends on your financial situation and what you want out of your death benefits. Regardless of your individual circumstances, be sure to read what customers have to say about their experience with their insurer and select from among the best life insurance companies, based on customer satisfaction rankings.

Permanent life insurance doesn’t go away

Term life lasts a specific amount of time. It could 10, 20, 25 or 30 years. People often buy these plans to protect their families from losing their homes if the unthinkable happens. Term life policies are best when in effect during your peak earning years. Homeowners often have a term life policy for the years when they have a mortgage.

Permanent life insurance, on the other hand, is for life. This prevents you going without insurance later or having a difficult (and potentially costly) decision whether to buy another policy when your term policy expires. You’ll pay more for insurance if you convert to a permanent policy when you’re older.

Plus, if you have a child or two in college, an expensive mortgage and hefty credit card bills, you may find you can’t afford a new permanent life policy later in life. Instead, buying a permanent life policy when you’re in your 20s or 30s can give you peace of mind, guarantee you coverage and not tempt you to go ahead with no coverage later.

Joshua Hubbard, an Allstate insurance agent in Merrimack, NH, said permanent life insurance is best for people looking to buy insurance at a younger age. It’s more expensive than term, but is more affordable if you’re under 40.

“Whole life insurance is permanent and you lock in that rate for your entire life, where term is just for a period of time,” Hubbard said.

Permanent life builds cash value

One benefit of permanent life insurance is that you can tap into it. “Whole life also builds cash value, so if you are young and have it in your budget, whole life is the way to go,” Hubbard said.

The insurer sets aside part of the money you pay in premiums. The amount of your premium that goes to cash value is large at first as you build it up.

Cash value grows over time and you can tap into it after a certain period.

“Over time, your benefit is actually increasing, plus you can even borrow from it and take small loans from the cash value that has built over the years,” Hubbard said.

Some people use money from their permanent life insurance to help during retirement years. Cash value is an excellent perk of permanent life insurance, but it’s not a good idea to think of it as your sole retirement or savings plan.

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You can add riders that help you while you’re alive

Permanent life policies often provide riders.

They’re kind of like options on a car. For instance, you can buy the standard model of a car or you can add a sunroof, backup camera, heated seats and a navigation system for more money. Life insurance policies offer similar add-ons, but rather than power seats, you get peace of mind.

Here are just a few of the riders you can add onto your policy:

Accelerated death benefit rider — Provides the option to collect a portion of your death benefit while you’re alive if you’re terminally ill.
Critical illness rider — Gives you money if you’re diagnosed with a critical illness to help with medical expenses.
Guaranteed insurability rider — Lets you buy additional life insurance later without going through a medical exam.
Long-term care rider — Permits policyholders to tap into death benefits to pay for long-term care.
Waiver of premium rider — Allows you to skip your premium if you become disabled.

Those are just five examples of what you can add to a permanent life insurance policy, but it shows how you can customize a plan that meets your future needs.

Guarantees that your loved ones are taken care of financially

Permanent life insurance isn’t going away as long as you make your payments. You don’t have to worry that in 20 years your coverage ends.

You’ll pay higher premiums, but with permanent life insurance, you have peace of mind that your loved ones will be protected financially.

You won’t have to face questions about what to do at the end of a term life policy. You also won’t have to deal with the future decision of whether to pay higher premiums by converting a policy to permanent life, getting new term life or renewing your policy down the road when it’s going to cost you more.

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Les Masterson

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Les, a former managing editor, insurance, at QuinStreet, has more than 20 years of experience in journalism. In his career, he has covered everything from health insurance to presidential politics.