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Term vs. perm life insurance: Which one is right for you?

Term or perm? It's the age-old question when it comes time to buying life insurance. Term life insurance and permanent life insurance serve important purposes, but they'r intended for different needs.

Here are ways to assess which one is right for you.

Term life insurance is good if . . .

You see an end to your need for life insurance: Term life got its name because it covers you for a certain period of time. Typically the term is anywhere from five to 30 years. If you die within the term, the life insurance company pays a death benefit to your beneficiary.

term vs. perm life insuranceSay, for instance, you have young children and a spouse who depend on your income. You likely want enough life insurance to pay off the mortgage and other debts, fund the kids' education, and sustain the family until the kids graduate from college and your spouse is set for retirement. If you are 45 years old, a 20-year term life policy might fit the bill.

You will not leave a large estate: Since term life may expire before your death, it’s not a good option for people who want to be sure that heirs have money to pay estate taxes. If taxes on a large estate aren’t a concern for you, term life may be sufficient.

You want the cheapest life insurance possible: Term life is far less expensive than permanent life insurance, especially if you're healthy. 

According to life insurance quotes from Compulife in January 2019, here's what different nonsmokers with Preferred Plus health would pay annually on average for a 30-year, $250,000 term life insurance policy:

  • 30-year-old woman -- $322
  • 30-year-old man -- $391
  • 40-year-old woman -- $502
  • 40-year-old man -- $624

You could also decide to take out a shorter policy. Let's say you have 20 years left on your mortgage and want to make sure that's paid for if you die. Here's what you would pay annually for a 20-year, $250,000 term life policy if you're a person who's a nonsmoker and listed as Preferred Plus health:

  • 30-year-old woman -- $234
  • 30-year-old man --  $271
  • 40-year-old woman -- $342
  • 40-year-old man -- $402
  • 50-year-old woman -- $686
  • 50-year-old man -- $889
  • 60-year-old woman -- $1,689
  • 60-year-old man -- $2,247

The reason why you'd pay nearly 10 times more if you're a 60-year-old man than a 30-year-old man is that you're likelier to die between the age of 60 and 80 than 30 and 50. That means there a greater chance the insurer will have to pay out if you take out a policy at 60. Hence, the higher rates. 

If the policy term expires before you die, think of it this way: The insurance still served its purpose by providing a safety net during those crucial years so you could focus on providing for your family, knowing they'd be OK financially without you.

Permanent life insurance is good if . . .

You want coverage in place for the rest of your life: Permanent life insurance remains in place for your whole life, as long as you pay the premiums. If you definitely want to leave money to your heirs via life insurance, permanent life is the right choice.

You want to be able to extract money from your life insurance: Permanent life policies include a savings account known as cash value, which grows gradually on a tax-deferred basis. Sometimes permanent life is referred to as "cash-value life insurance." You can borrow against the cash value and use the money for anything you wish. Once the cash value reaches a certain level, you can use it to pay the annual premium. Or you can surrender the policy for the cash value, but the amount will be substantially less than what you paid in.

Keep in mind that the cash value builds slowly and doesn't reach a substantial sum for 20 or so years.

You have a special needs child: A permanent life insurance policy can be an important financial planning tool for parents of special-needs children. Proceeds from the policy can fund a special-needs trust for the child after the death of the parents.

You will leave a large estate or business: Permanent life insurance plays an critcal role in estate or business succession planning. Heirs of large estates or family businesses can use the death benefit to pay the estate taxes. Without the life insurance proceeds, they might face having to sell off family heirlooms, property or the family business to pay the taxes.

Converting to permanent life insurance

If you buy term life and have regrets about your choice, know this: Most term life policies sold today are convertible to permanent insurance. You can convert all or portions of the term life policy to permanent insurance without having to provide your latest health information.

Be aware term life policies have deadlines for conversion, often years before the term ends. And the choices of permanent policies to which you can convert depend on the insurer and the term life policy.

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