According to industry experts, most people don’t have enough life insurance. LIMRA, which keeps close tabs on the industry, recently reported that average coverage equals $163,000, which is equivalent to approximately 3.5 years in terms of income replacement (with the average income being $46,800 in 2019, according to the Bureau of Labor Statistics). That’s only half the recommended 7-year threshold.1,2,3
Furthermore, more than half of consumers said that their households would be in immediate or near-immediate financial trouble if the primary wage earner died today.2
When considering life insurance, one of the most important factors to understand is the difference between term and permanent insurance. Here’s an inside look at both.
Term and Perm
Term life insurance is temporary; it provides a death benefit for a specific term, such as 10, 20, or 30 years. Unlike other types of life insurance, it does not accumulate a cash value. If the policyholder dies during that term, their beneficiaries receive the benefit from the policy. When the contract ends, so does the coverage.
This limited term leads to term life insurance’s main advantage: price. Generally, term life insurance costs less than permanent life insurance, especially if the purchaser is younger. This has the potential to free up funds for other household expenses.
Permanent insurance remains in place as long as the policyholder makes payments. In addition, permanent policies are designed to build up “cash value,” a cash reserve that accumulates with the policy. Typically, this cash reserve pays a modest rate of return. However, the policyholder has limited access to the funds.
Which Should You Choose?
Term life insurance can be designed to provide protection against upcoming expenses, such as putting children through college. Permanent life insurance, on the other hand, can be more useful for covering long-term financial needs, such as estate planning.
Many people find that they have a combination of short- and long-term needs. In such circumstances, it may be prudent to have both types: a basic level of permanent life insurance supplemented by a term policy. A review of your situation may help determine what type of life insurance is appropriate.
Several factors will affect the cost and availability of life insurance, including age, health, and the type and amount of insurance purchased. Life insurance policies have expenses, including mortality and other charges. If a policy is surrendered prematurely, the policyholder also may pay surrender charges and have income tax implications. You should consider determining whether you are insurable before implementing a strategy involving life insurance. Any guarantees associated with a policy are dependent on the ability of the issuing insurance company to continue making claim payments.
Term or Perm?
In 2018 people purchased more permanent life insurance policies than term life insurance policies. The total number of term policies, however, accounts for approximately 70% of all policies issued.3
Source: American Council of Life Insurers, 2018
1. LIMRA, 2018
2. U.S. Bureau of Labor Statistics, 2019
3. American Council of Life Insurers, 2018
The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG Suite is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright 2021 FMG Suite.
Rees Bridges brings a unique value to the IFW as both a highly accomplished creative professional and a successful financial services executive to serve in his role as Senior VP, Marketing & Communications.
Over the last decade Rees has served as the lead marketing & communications professional for a Fortune 500 Financial Services firm. He oversaw all advisor marketing strategies, client communications, and the entire firms branding and marketing initiatives.
Rees continues to pursue his passions as a creative professional & musician for over 30 years, with an impressive profile and reputation as a designer, performer, teacher, and studio musician. Here is a little secret: He serves in the role as an international clinician for Mapex drums, Paiste Cymbals and held the record for world’s fastest drummer between 2006 and 2007.
Rees grew up in London, England and currently resides in Miami, Florida. When not at work, he enjoys spending time with family and friends, traveling, and indulging in his passions for music and creative pursuits.