Welcome back! Hopefully you read my last article, where I discussed three reasons why considering life insurance should be a priority. If one of these reasons resonated with you, or you have one of your own, I want to give some thoughts as to the different types of life insurance. Broadly, there are two categories: term insurance and permanent insurance.
Term insurance is simple – you pay an annual premium for the number of years in the term, and, other than a few exceptions, the insurance company will pay your beneficiary the death benefit if you were to die during the term of the policy. For example, I own a 20 year term policy, running from 2018 to 2038. If I were to die in 2030, my wife would receive the $1,000,000 death benefit, tax-free.
Permanent insurance is a little more complex. Within the category of permanent insurance, there are several types, but we will focus on the two main “flavors.”
First, there is “protection-based” permanent insurance. Protection-based permanent insurance is designed to provide a death benefit for your entire life. Instead of securing a death benefit for a 20 year period, this kind of policy can provide a death benefit to your beneficiary regardless of how long you live.
Second, there is “accumulation-based” permanent insurance. It also has a death benefit, but is really designed to grow cash value within an account housed at the insurance company. A portion of the premium you pay goes to cover the cost of your death benefit, a portion goes to the insurance company’s operating expenses, and a portion goes into an account for you. As you pay premiums, the cash in the account grows. Depending on the strategy of distributions, you can leverage this cash value in tax-advantaged ways.
So you are probably thinking…why wouldn’t I always buy permanent insurance over term, as it has much more benefit?
You guessed it: permanent insurance is more (and can be much more) expensive than term insurance. But, most millennials are at a point in their financial journey where permanent insurance is not only too expensive, but is unnecessary. You are likely better off focusing on maximizing your contributions to tax-advantaged accounts like a 401(k) or IRA, but also securing term insurance to protect your finances. (And, if you remember from the last article, term insurance sometimes can be converted into permanent insurance!)
Remember: the cheapest day to buy life insurance was yesterday. If you just need term coverage, you are in good company. If you can afford permanent coverage, that may be a better fit. Either way, make sure you are protecting the financial plan you work so hard to build.
Want more information on life insurance? Let’s talk! Face The Fear is here to help millennials make smart financial decisions that fit their lifestyle.
Article Contributed By: Xavier Serrani
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