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At first glance, based upon cost, it is easy to understand why someone considering life insurance would be most interested in purchasing a term policy. The premium is typically significantly smaller than the premium for a permanent policy for the same amount of death benefit. However, the initial death benefit is where most of the similarities end.
Understanding the difference between term and permanent life insurance is critical so that the objective for the coverage is met. If a policy is not in-force when the liquidity from the policy’s death benefit is needed, a well-organized financial plan may be crippled.
The team at C3 Financial Partners works with clients and their other trusted advisors in providing clarity in understanding the difference between term and permanent insurance, the confidence to choose a policy which best fits a client’s long-term goals and objectives and coordination in implementing and managing a life insurance solution.
Clarity
There are two types of life insurance: term and permanent. Term insurance only lasts for a specified “term” period — 10, 20, or 30 years, for example.
Permanent insurance is as it sounds — coverage that remains in place until the death of the insured. In addition, permanent life insurance can be a financial tool that can help the policyholder build additional wealth by accumulating cash inside the policy.
The primary purpose of all life insurance is to provide immediate liquidity to meet a financial need. This liquidity can come from either the death benefit or, in the case of many permanent policies, the cash value.
Term Life Insurance
Term life insurance is a simple, relatively inexpensive way to obtain life insurance coverage. If the insured dies while the coverage is in force, the beneficiaries receive the death benefit proceeds. If the insured does not die, the policy stays in force until the end of the term so long as the required premiums are paid.
For simplicity’s sake, think of term life insurance like renting an apartment. There are a lot of similarities:
- The policyholder plans to use the policy only for a limited period of time;
- The term policy is almost always less expensive than purchasing a permanent one;
- The policyholder does not build equity; and
- At the end of the term, the policy, like the apartment, is gone.
It may seem odd that anyone would purchase life insurance that ends after 10, 20 or 30 years, but there are circumstances in which it makes sense. For example, if the client is:
- Young, they may simply require inexpensive coverage to pay off debts, leave money to their significant other or young children, or to absorb funeral costs;
- Fiscally minded, they may want to lock in a 20- or 30-year premium at a relatively low rate while they’re still young and healthy; and
- In the final decade of their career, they may want coverage in an amount that will replace lost income if they unexpectedly die, enabling the client’s spouse to still achieve retirement goals.
In each of these situations, it may be in the client’s best interest to consider convertible term life insurance. Convertible term life insurance is a term life insurance policy that includes a rider that allows the policyholder to convert their policy to a permanent policy with no additional underwriting. Most term life insurance is convertible for some period of time.
Among affluent clients, term life insurance applications are generally limited. C3 Financial Partners is able to determine if a term life insurance is suitable for a prospective policyholder’s unique situation.
Permanent Life Insurance
Permanent life insurance provides protection for the policyholder’s entire life — it does not expire like term life insurance as long as required premiums are paid.
If term life is a rented apartment, permanent life insurance is the house that has been purchased as the ‘forever home.’ Here are some similarities:
- The client owns it for life, so long as required premiums are paid to keep the policy in force.
- Premiums are typically higher.
- The permanent policy has equity in the form of cash value that is intended to grow over time.
- It is an asset that a client can borrow from, or against.
- It will benefit the client’s family (in the form of the death benefit).
Permanent life insurance comes in a variety of types and options. Mainly, the products have names that include the terms fixed, flexible, whole and universal.
Although permanent life insurance is generally more expensive than term insurance, it can be put to use as a financial tool during the policyholder’s lifetime.
For example, it holds a cash value that can be withdrawn or borrowed against to meet an expected or unexpected need for liquidity. Plus, the policy’s cash value sits as an asset on a personal balance sheet or as a stable asset class in a client’s investment portfolio.
For many clients, a permanent life insurance policy may fit more than just one planning goal. The life insurance specialists at C3 Financial Partners can explain how permanent life insurance may provide a multitude of benefits beyond a lasting death benefit.
Confidence
Deciding whether life insurance coverage should be temporary or permanent can be tricky. C3 Financial Partners has developed a flowchart to help determine which product type is best based upon each client’s individual situation. By following a decision tree, clients and their advisors can gain confidence that the appropriate product type is being selected.
Also, because no one has a crystal ball, if a convertible term policy is purchased today and, down the road, the policyholder develops a need for permanent coverage, C3 Financial Partners can assist in converting/exchanging the coverage – with no additional underwriting.
Coordination
C3 Financial Partners has decades of experience in coordinating with clients and their advisors in implementing life insurance solutions. Regardless of whether a term or permanent policy has been purchased, there are additional steps to integrating life insurance into a financial plan. How the policy is owned – personally or by a trust or company — may have income and estate tax consequences. The source of premiums and how they are paid to the insurance company is important for not only the sustainability of the policy but also in not triggering unnecessary gift taxation.
In addition, having the correct ownership and beneficiary(ies) identified and accurately listed will prevent ambiguity when it comes time for the death benefit to be paid. Clients and their advisors can rely upon C3 Financial Partners to assist in structuring a life insurance solution to meet established goals and objectives.
At C3 Financial Partners, we look forward to helping our clients and their advisors gain clarity in their goals and objectives, confidence that they are making the right decisions, and coordination with other advisors.
