For an answer, we talked with Farmers Life® Director of Advanced Markets Thom Robb, who helps Farmers® agents with customers evaluating their life insurance planning.
Which is a better tool, a hammer or a saw? It depends on what you’re trying to do. Life insurance is the same way. Insurance policies are financial tools. Policy types are different because they’re designed to do different things. So the real question isn’t which one is a better tool, but which tool fits your situation better.
Term life insurance covers you for some number of years — say 20 years – at a fixed cost. That’s the level premium period of your insurance. Premiums stay level and usually are much lower than other types of life insurance. When your level premium period ends, your policy may stay in force, but as you age, your risk of dying goes up and the cost of term insurance goes up each year as well. Term insurance can stay in force until the term ends when you’re 90 years old, but few people would choose to keep a policy for that long because of the cost later in life.
People often buy term for that lower initial cost. That can make a lot of sense if you’re looking at a financial concern that has an end date. For example, say you have a 10-year-old, and you’re saving for her college education. You want to leave money to help pay for that if you’re gone. An inexpensive 10-year term policy may be a good option. It provides low-cost coverage long enough to meet that need if you should die.
Permanent life insurance is designed so you can keep it in force for the rest of your life. It costs more at first, sometimes a lot more. But that higher premium can build cash value within the policy. As you get older and your risk goes up, that cash value can help keep your insurance in force and affordable. Plus, with many policies, you can make use of that cash value while you’re still alive.
Let’s say instead of saving for college, you’re worried about providing lifelong support for your special-needs child. You’ll probably want that benefit available no matter how old you are. Permanent life insurance policies can stay in force until you’re 121 years old. A whole life policy will have premiums that are guaranteed never to increase. A universal life policy is a more flexible kind of permanent life insurance, allowing you to adjust premiums and the amount of coverage within contract limits. Either one could provide the lifetime coverage you’d want in this situation.
Of course, just like hammers and saws, sometimes the real answer is that you want more than one tool to get the job done. Many people choose a term policy for short-term issues and a permanent policy for life-long concerns. That way they only pay the higher cost of permanent coverage to deal with permanent situations.
A Farmers agent has tools to help you evaluate your choices. Because really, the best policy is one you’re comfortable keeping in force until you need it.
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1 Lifetime coverage (or life of the policy) is guaranteed as long as all premiums are paid to keep the policy in force.
2 Cash values may be accessible through policy loans. Policy loans that are not repaid and partial surrenders will reduce cash surrender value and death benefit. Policy loans are subject to interest charges. If your policy is a modified endowment contract, loans and surrenders may incur taxes and penalties.