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March 2015

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Term Life vs. Permanent Life Insurance Simplified

It really is quite scary how our lives can end without any warning. Randomly a few months ago, I started wondering what would happen to my parents if I suddenly passed away. What would they do, who will take care of them, will they ever be able to retire and will my brother have to make sacrifices in his life to financially support my parents? 

This terrifying thought sent me to research on insurance and it took shifting and rereading a few sites to even figure out the rudimentary lingos of the insurance world. I hope to share with you what I have learned in the process.

The two most popular form of insurance is term life versus permanent life.

Term Life Insurance:

Term life insurance fundamentally is coverage in case you pass away.

For example, if you sign up for a 10-year term life insurance for $250K, you agree to pay a monthly payment of $15 to an insurance company. In return, if you pass away during the 10-year period, the insurance company is obligated to pay $250K to your beneficiaries. If you don’t pass away during the 10 years, then your policy will expire and you policy has no value (you get no money). It is also important to note that your beneficiaries will get the payouts tax free.

Although you’ve signed up for a “10 year” policy, this only means your rate is locked in for 10 years (i.e., your monthly payment of $15 will stay the same). However, you can cancel or change the terms of your policy at any time. (Please check with you specific insurance company to confirm, this was my experience at New York Life)

Pros:

  • Relatively inexpensive premium payments
  • Great for individuals with other investment accounts
  • Great for temporary coverage (after the 10-years hopefully you will have enough savings to pass on or your children will be adults thus needing less financial support)

Cons:

  • You get nothing if you don’t pass away (this really is a pro, it means you are still alive!)
  • The monthly premiums can be a financial burden if you have a tight budget

Permanent Life Insurance (Also known as Whole Life Insurance):

Permanent life insurance is in many ways a retirement savings account.

For example, you agree to pay the insurance company $5K a year from now until you are 63. Then when you turn 63, for 20 years, the insurance company will pay you $20K annually. There is also the Guaranteed Death Benefit so your beneficiaries will receive certain payout in case you pass away.

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