Which is best: Term or Permanent?

This is a question we are asked over and over again.  Some experts believe it is best for a consumer to buy term.  Term is less expensive, leaving more spendable income to be earmarked for investment.  Surveys have shown that though many people have good intentions of investing the difference, it never happens. 

There are also those who consider permanent as the path to life insurance coverage.  It  secures a level premium for a lifetime.  And also allows for a buildup of cash value that grows tax deferred.

Both types of insurance have their benefits.  The best way to choose is to evaluate your own individual needs.  Every person’s situation is different.  Your choice of a life insurance product should fit both your needs and your budget.  We at GHR are able to assist you in this evaluation. 

Outlined below are some of the benefits of Term and Permanent Life Insurance:

Benefits of term:

• Less expensive
• Easy to understand
• Can be purchased to meet specific financial needs and time frames. (covering a mortgage, college expenses, buy/sell agreements in Business applications of Life Insurance)

Benefits of permanent:

• Level premium for life.
• Flexibility of using the cash value.
• Having an affordable premium and a death benefit  into your late retirement years.  (some life insurance companies do not offer term polices after age 70. And if they do, the premiums are quite high)
• No immediate taxation to the growth of your cash value.
  

Term Insurance

Term insurance is the simplest form of life insurance.  It has no cash value.  All of the premium you pay goes to cover the cost to insure you.  Term insurance allows you to  insure your life for a large dollar amount, for a specific period of time, for the least cost to your budget. 

Insurance companies offer policies in 10, 15, 20, or 30 year increments.  At the end of those periods you have the opportunity to continue for another term.  However, your premium is dependant of your age.  For example, at age 30 you purchase a 20 Year term policy.  Twenty years later when the term is up for renewal you will be age 50.  The new premium will be calculated at age 50.  The older you are the higher the cost.

Term life insurance can be used to cover large dollar amounts needed for your heirs.  Some of those needs could be: 

• To pay off your mortgage.
• To create college funding for your children.
• To provide a lump sum that can be invested and used to supplement your heir’s income when your income is no longer available.  See  “How Much is Enough”
• Business applications of life insurance  such as  funding  buy/sell agreements or key man insurance.
  

Permanent Insurance

Permanent life insurance is protection that pays a death benefit to your heirs.   The premium that you pay at the beginning of the policy remains the same throughout your lifetime.   As you pay each premium, part of it goes to the costs of insurance and part of it goes to a cash savings.     

There are two basic types of permanent life insurance. Whole Life and Universal Life.

Whole Life

Whole life provides a death benefit and builds up a cash value over time.  The premium remains level for the life of the policy.  Most whole life policies offer dividends in cash or can be used to purchase more insurance.

The death benefit and premium payments remain the same for the life of the policy.  In other words it stays the same for the whole life of the policy, without any flexibility to change it.

Universal Life

Universal life provides a death benefit and builds up a cash value over time.  The premium remains level for the life of the policy. 

The owner of a universal life policy has much more flexibility to make changes after the initial purchase.  Outlined below are some of the options:

• Change the amount of the death benefit.
• Change the amount of premium payments.
• Take loans from the cash value.
• Take withdrawals from the cash value. 

Each of the changes should be evaluated as to how it would affect the policy as it continues into future years. 

Business Applications of Life Insurance

Funding Buy/Sell Agreements

A Buy/Sell Agreement is a contract between business partners that spells out what will happen to the business partner share of the business if he or she were to leave due to death, disability, or retirement. 

Advantages of a business continuation plan

• Arranges for a business to survive the death of an owner
• Provides a plan for dealing with the company’s liabilities and financial responsibilities
• Creates a market for the business interest
• Converts a business interest into cash for heirs
• Prevents delay in the estate settlement process
• Provides money to fund the plan
• Helps fix the value of the business interest in the estate

Many business owners start the process and go as far as to get the agreement drawn up. Yet they fail to fund the arrangement. Outlined below are options for funding:

• Life insurance, term or permanent, is an excellent way to fund for the death of a partner.
• A permanent cash value life insurance policy is an option that would provide funding for death and retirement.  Obviously, the death benefit is there for unexpected death prior to retirement.  The cash value would be there when the partner reaches retirement.
• A Disability buy/sell insurance policy would be there to provide the funds to buy out the disabled partner.   The benefits can be received as a lump sum, a monthly installment, or a down payment with a monthly installment.

Keyman Insurance

All of your employees are an important part of your business. They provide great service to your customers.  Still, there may be one or more employees that are instrumental to the daily function of your business.  Your business would feel their absence because of the responsibilities they hold. 

 Keyman life insurance is a way to provide your business a smooth financial transition at the loss of an employee due to death.  The death benefit would supplement the possible loss of revenue to the business at losing the key employees skills and abilities. 

The business would take an insurance policy out on the life of the employee.  The business would be owner and beneficiary of the policy.    

Non-Qualified Executive Bonus Program

Retaining key employees in a competitive job market is a concern for the business owner.  Key employees are equally concerned that their total benefit package is sufficient to meet their present needs as well as those financial needs at retirement.

A non-qualified plan is a way to provide incentive for the executive to remain with their employer.  It also allows for tax deferral of income.  A non-qualified plan is not restricted to contribution limits as qualified plans are.