Families and businesses use life insurance for a multitude of reasons. It is often an essential part of an estate plan. When investing in life insurance, you always have to make the permanent life insurance versus term life insurance decision. There are many cases in which term insurance is appropriate. Why? Read on.
Why Life Insurance?
Life insurance is used for several purposes:
- Create an estate
- Replace income
- Equalize an estate
- Pay taxes
- Fund a buy/sell agreement
What’s the Difference: Permanent Versus Term?
In a nutshell, permanent insurance is term insurance plus an investment. And, term is pure insurance.
Permanent insurance costs more because you are paying for the insurance coverage plus making an investment. There is a point where the underlying insurance is paid up.
And, if you hit a rough patch and stop paying premiums for a few months or so, the built up value in the life insurance can pay the premium.
On the other hand, term insurance is less expensive, but is never paid up. You will have to keep paying the premiums so long as you wish to keep the insurance coverage.
If you hit a rough patch and stop paying premiums, term insurance will lapse.
Indications you should buy term insurance
- You need the insurance for a particular period of time such as 10 years or until the kids are through college.
- You have limited resources.
- You need a substantial amount of insurance coverage.
- Insurance will be used as income replacement for a family primarily dependent on the income of one spouse.
- Insurance will be used to pay mortgage if one spouse dies.
- Insurance will fund education for children.
- Insurance will cover a few key employees.
- Insurance will be used for new company that needs a loan or credit.
If you have questions about how life insurance affects your estate planning, consult with your insurance agent or a qualified estate planning attorney.