The underlying goal of life insurance is to provide financial security for your family. As your life changes and evolves, your needs are likely to change as well. What once made the most sense in your 20s may not hold true your 30s, 40s, and so on. It’s possible that you’ve already purchased either whole life insurance or term life insurance, and now that your needs are different, you may be wishing for a do-over. Conversely, you may be satisfied with your current life insurance, but attracted to the different benefits both permanent and term life insurance offer.  

The good news is: you can have both whole and term life insurance.

 

The Differences Between Permanent & Term Life Insurance

 

Term

Term life insurance is the most basic type. The policy covers a set number of years, anywhere from 1 to 30. For younger people, this is often the least expensive option as it features relatively low rates for a fixed number of years. You’ll want to consider the length of the policy you purchase. If it expires and you want to renew, you’ll be older, and the rates will be higher. Term life insurance doesn’t have a cash value component (more on that below) or lifetime coverage. Essentially, your dependents don’t collect on the policy unless you die within the term period.

 

Permanent

Permanent life insurance policies cover you until the day you die, no matter when it happens. The premiums can be fixed or flexible. The biggest benefit is the cash value component. The insurance company invests your premiums to build up cash reserves in your account. You aren’t taxed on the investment earnings until you cash in the policy, and you can borrow from the reserves. The drawback to permanent life insurance policies are higher premiums compared to term policies. Consumer Reports shows that a 40-year-old man in perfect health who wants a $500,000 policy would pay $6,670 in annual premiums for a “Whole life” insurance policy versus $660 for a term policy.

Permanent life insurance policies can be further broken down into subcategories, each type allowing for various degrees of control where the money is invested. 

  • Whole Life

    • This is the most basic type of permanent life insurance. Whole life features a fixed premium, meaning the rate you pay for your policy will never increase. However, the consumer has no control over where the money is invested. Whole life offers a certain amount of certainty, as your policy builds a cash value and the death benefit amount is guaranteed to your dependents.

  • Universal Life

    • This policy has a cash value that’s determined by short-term interest rates rather than the stated long-term rate of a whole life policy. The interest rates can fluctuate, but cannot fall below the policy’s guaranteed interest rate. The policyholder can shift funds between insurance and the savings components of the policy and can use savings to make premium payments. The premiums are flexible, meaning you can adjust your premiums and coverages as your needs change over time.

  • Variable Life

    • This type of policy gives the consumer control over where their savings are invested. The rate of return on investments not only impacts the cash value of the policy, but also will increase or decrease the amount of the final death benefit. The premiums in this model are fixed.

  • Universal Variable Life

    • This is a hybrid of the two. It allows for flexible premiums and for your cash value and final death benefits to be affected by the performance of your investments.

 

Why Have Both?

Now that we understand the differences between the two, let’s consider some scenarios of why you might want to carry both permanent and term life insurance. As mentioned earlier, simply put, your needs change. You may have purchased either a permanent or term policy earlier in your life, and now there’s been developments in which you feel your current policy may not provide adequate coverage. For example, perhaps you’ve had another child or bought a bigger house, or you’ve become a business owner. In those scenarios, you might consider additional life insurance coverage.

In any case, there are plenty of life changes of why you might want to consider both term and permanent, including a higher income. When you first purchased your life insurance, you may not have been able to afford permanent life as they’re significantly more expensive policies than term life insurance. You may have reached a point in your life where the benefits of permanent life insurance are attractive and financially feasible. Since you already have a term policy, you have that protection for a fixed amount of years. With that in mind, you might be able to tailor a less expensive permanent policy with less coverage, but the benefits of the cash value component.

Conversely, if you find yourself needing more coverage and you already have a permanent policy, you may want a term policy to cover you for only as long as you need. For example, you have a permanent policy, but with a new house and a new child, you want more coverage. Consider that your house will be paid off in x amount of years and your child will be self-sufficient in y amount of years. You can purchase a term policy, which are relatively inexpensive compared to permanent policies, and have additional coverage for only the years you deem necessary.

 

Having both term and permanent life insurance policies offers a great deal of flexibility. If you’re willing to shop around and compare quotes, there’s a good possibility you can find a policy that will provide the level of coverage that you’re comfortable with.