In general, there are two types of life insurance: term life insurance and “whole” or “permanent” life insurance. The best way to think about these two types of insurance is to imagine renting versus owning your home.
If you rent your home, you’re paying a premium every month to live in a space. You can use the space for the set period of time your lease is written for, but after that your landlord can take it away or re-rent it to you (sometimes at a higher rate).
Although that unknown may cause some stress, there are benefits to renting! Pricing might be lower than owning your home, and you don’t have to worry about any ongoing maintenance costs, or other fees that come with having a mortgage.
If you own your home, you pay a premium upfront and ongoing through your mortgage to live in a space. You’ll own the home until you pass away, assuming you continue to make regular payments, but you often have to pay more to maintain it.
In the world of insurance, term life insurance is “renting” a policy. You pay a monthly fee (often lower than purchasing permanent life insurance outright) and, in a worst-case scenario, your insurance will pay out to your beneficiaries.
Term life insurance typically comes in 10-year, 20-year, and 30-year policies. Once the term is up, you can choose to get a new policy or you may decide you have enough of a nest egg that life insurance isn’t necessary.
Permanent or whole life insurance is more similar to owning your home. You often pay a premium for the policy upfront, and continue to pay into it until you pass away.
However, because the policy is for your whole life, you’re insuring the inevitable. Your insurance company knows you will pass away eventually, and that the policy will have to pay out. Because of this, the policy premiums are often much more expensive.
More often than not, people don’t need a whole or permanent life insurance policy. In some cases, it may make strategic sense to pursue one, but those cases are few and far between. Typically, younger people who are still in “asset accumulation” mode can leverage one (or multiple) term life insurance policies to help ensure that their loved ones are financially secure if they pass away early or unexpectedly.
Then, as they continue to accumulate wealth and build a solid asset base, they may find that they need less life insurance as they age. In some cases, they may not need a policy at all as they near retirement.
Do you have questions about insurance? Creating a risk management strategy using different types of insurance is part of building a holistic financial plan. We’d love to help you figure out how insurance fits into your bigger picture. Contact us today by clicking here.
0:35 Renting v. Owning In Life Insurance
1:50 Assessing Different Scenarios When It Comes to Insurance
2:40 Prepaying an Inevitability
3:30 The Risk of Permanent or Whole Life Insurance
4:13 Building Wealth v. Obtaining Insurance