Term Insurance is like renting
You will have a roof over your head while you need it but once the coverage ends you walk away from the policy and have nothing to show for it (similar to renting).
The policy coverage and rate is only guaranteed for the length of the term, usually 10 or 20 years. Unless there is a claim and the policy pays out there is no value when you cancel or when the term ends. After the term ends, the policy can be renewed; however, the premiums will be much, much higher as you are now 10 or 20 years older.
Permanent Insurance (Whole Life) is like owning
The policy can be completely paid up in 20 years and it is guaranteed to pay out (similar to owning a home). There is equity that builds up in the form of a cash surrender value.
The coverage is guaranteed for life and the rate is guaranteed for 20 years and after 20 years the policy is fully paid up and there are NO more premiums to be paid.
If you are able to make it work in your budget, we usually recommend a Term and Permanent Insurance Split.
Here is an example of the 20 year plan we recommend to clients
We will say the need is $500,000 of coverage, this is for a 35yr old Male:
$100,000 of 20pay whole life insurance
$400,000 of 20 year term life insurance
Premium = $156/month
After 20yrs he is done paying for insurance. Done.
The Term insurance falls off and he is left with the $100,000 whole life policy.
Because the policy is whole life and it appreciates, after 20 years this policy is now worth $116,000 of coverage and has a cash value of $56,800*.
After 35 yrs (keep in mind they have not paid anything into the policy in 15yrs) the death benefit is worth $164,000 and the cash value is at $100,600*.
The cash value means that if they cancel the policy at any time they will receive the total amount tax-free (in this case it would be $100,600 at age 70).
They can also borrow against it and any amount owing would just get deducted from the death benefit payout.
At age 85, the death benefit would be $250,000 and the cash surrender value is $202,000*.
*based on current dividend scale
By combining the two types of insurance, the client gets the most bang for his buck and after 20yrs has a life insurance that is paid up for life, continues to grow, and is guaranteed to pay out.
If you have not reviewed your life insurance coverage in some time, please give us a call for a free consultation 778 245 2226