Investing In Your Future: Term Insurance Vs. Permanent Insurance 

By Patrick N. Rush

The purchase of a new home is an exciting time, but it can also lead to some serious concerns about protecting your family from a financial catastrophe. Would my spouse be able to continue making mortgage payments if I die? Would my spouse and children be able to maintain a reasonable standard of living? Will my children have enough money for their educational needs? All of these concerns can be addressed through the purchase of life insurance.

There are two general types of life insurance: term and permanent. But which type is best for you? To answer this question, we need a true understanding of your goals, objectives, time horizon, and risk tolerance. However, for pure protection purposes, term insurance is usually adequate. To understand why, we need to look at the differences between term and permanent insurance.

Term insurance provides protection for a specific period of time, i.e. 5, 10, 20, or 30 years. Premiums are paid strictly for protection of one’s life. No part of the premiums paid accrues into cash value. The insurance contract ceases at the end of the specific term. In effect, a person can pay 30 years of premiums for a term insurance policy and have nothing to show for it if he/she did not die during that time period. Sounds like you might be throwing your money out the window, right? Not true. Term insurance provides protection for your beneficiaries, gives you peace of mind, and can usually be purchased for a fraction of the cost of permanent insurance, assuming you are in decent health.
Permanent insurance comes in many forms: whole life, universal life, variable life, etc. The main difference between permanent and term insurance is that permanent insurance does not expire at the end of a specific period. As long as you continue to pay premiums, or until the policy is paid in full, the contract will stay in effect. Your premiums accrue into cash value as well. Therefore, you can withdraw or take loans out against the cash value of the policy. The interest rate credited to the premiums will vary, as will the interest rate charged to loans against the cash value.

Permanent insurance can be the right choice for those needing permanent life protection or those looking for possible tax-free growth within a portfolio. However, for those looking for pure life protection for a certain period of time, the advantages of permanent protection do not usually outweigh the disadvantages. The main disadvantage is the increased cost, which may prevent individuals from investing additional money into their company retirement plans and/or IRAs.

Let’s take a look at this candidate: Scott is 44 years old, married, with two children – ages five and eight. He makes $75,000 per year and his wife works part-time earning $15,000 per year. Scott plans on retiring at age 62, after he has saved adequately in his company 401(k) and his children will have finished college. He is interested in life insurance so his family will be able to maintain an adequate lifestyle if he were to die. Scott has a $150,000 mortgage he hopes to pay off by the time he retires, and has no money set aside for his children’s education. What type of insurance should he purchase?

Scott is a great candidate for 20-year term life insurance, assuming he is in decent health. He needs coverage to protect his wife and children for the next 18 years. Once he retires at age 62, Scott will no longer be faced with a mortgage payment, college expenses, or need to provide monthly income from employment. At Scott’s retirement, his wife will be able to draw income from his 401(k) savings, IRAs, non-qualified investments, Social Security, and possibly a pension plan. The mortgage and college expenses have been paid, the children are now adults, and his wife will have an adequate income to support her during her retirement years.

There are many considerations when deciding which type of insurance is best for you and the protection of your family. Please be sure to consult a certified financial planner to help evaluate your personal need for term or permanent insurance coverage.

Patrick N. Rush is vice president of First Horizon Investment & Insurance Services. He may be reached at 851-3115.