You may be wondering should I buy term or permanent insurance. Knowing how each works and the pros and cons can help you decide which is right for you. So let’s take a look at each.
While permanent life insurance is life-long, term insurance covers life insurance needs for only a set period of time or term – typically 10, 15, 20, or 30 years. After the specified period ends the coverage ends as well.
Why would you want temporary insurance? Let’s say you buy a house and are looking to pay it off in 15 years. In that case, you might buy a 15-year term life insurance to cover just those 15 years. After the mortgage is paid-up, the need to insure against the risk simply disappears. The expense has a set time period, so the insurance you buy does too. You can easily see that term insurance makes sense for a temporary risk.
Another thing to bear in mind is that term life insurance just has a death benefit. This means the amount paid out to the beneficiary is always the face value of the policy. If you buy term life insurance for $250K for example, in the event of the insureds death, then the policy pays out $250K.
Permanent life insurance has a death benefit just like term insurance, but permanent life insurance also has something called a cash value that grows tax-deferred. That’s why people sometimes choose permanent insurance – they get to save money in a tax-shelter inside the life insurance. What this cash value is and how it works depends on the type of permanent life insurance policy you buy.