According to industry experts, most people don’t have enough life insurance; and, more than half of consumers said their household would be in immediate or near immediate financial trouble if the primary wage earner died today.
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:
Permanent life insurance at a glance:
- Permanent life insurance remains in force for your whole life, as long as you remain current with your premiums.
- In exchange for fixed premiums, the insurance company promises to pay a set benefit when the policyholder dies.
- Permanent life insurance policies build up cash value — effectively a cash reserve that pays a modest rate of return.
- The growth is tax deferred.
- Guarantees are based on the claims-paying ability of the issuing company.
- Most permanent life insurance policies will let policyholders borrow against their policy’s cash value under fairly favorable terms.
- When the policyholder dies, his or her beneficiaries receive the benefit from the policy.
- Depending on how the policy is structured, benefits may or may not be taxable.
- If the policy lapses, matures, or is surrendered, the loan balance will be considered a distribution and will be taxable.
Term life insurance at a glance:
- Term insurance is the simplest form of life insurance; it provides temporary life insurance protection on a limited budget.
- When a policyholder buys term insurance, he or she buys coverage for a specific period and pays a specific price for that coverage.
- If the policyholder dies during that time, his or her beneficiaries receive the benefit from the policy.
- If he or she outlives the term of the policy, it is no longer in effect, and the person would have to reapply to receive any future benefit.
- Unlike permanent insurance, term insurance only pays a death benefit. That’s one of the reasons term insurance tends to be less expensive than permanent insurance.
- Many find term life insurance useful for covering specific financial responsibilities if they were to die unexpectedly.
- Term life insurance is often used to provide funds to cover dependent care, college education for dependents, and/or mortgages.
- Less than 2 percent of term policies actually pay out a death benefit.
Whether permanent or term life insurance is the best choice for your clients will depend on a variety of factors, including their unique goals, needs, and circumstances. Being able to communicate how life insurance works will help you help your clients make an intelligent, informed choice. The Circle of Wealth® system can help you communicate the many benefits of life insurance.