Life insurance is one of the most critical investments a family can make to ensure family security and peace of mind. As a business owner and resident of Harvest in Argyle, TX, nothing brings me greater pleasure than helping families prepare for life’s uncertainties. Knowing your loved ones will be taken care of no matter what happens provides a priceless sense of security.
When it comes to life insurance, there are two main types: Term Life Insurance and Permanent Life Insurance. Let’s break them down so you can make an informed decision.
Term Life Insurance: Coverage for a Defined Period of Time
Think of term life insurance like “renting” coverage. It provides financial protection for a set period of time (10, 20 or 30 years). If you pass away during the term, your beneficiaries receive the policy’s death benefit. However, if the term expires and you’re still alive, the coverage ends, and you have nothing to show for it.
Pros:
-Very affordable and straightforward.
-The most cost-effective way to put life insurance in place
Cons:
-No cash value accumulation
-Coverage ends once the term is up
-As you get older, the cost becomes cost prohibitive
Ideal for: Young families, people with tight budgets, or those looking for temporary coverage during critical years (like raising a family or paying off the mortgage).
Permanent Life Insurance: Lifelong Protection
Permanent life insurance ensures coverage for your entire lifetime (as long as premiums are paid). It’s designed for those who want protection and can commit to higher premiums. There are many variations within the scope of permanent life insurance, but they mainly come down to 2 forms:
This type provides a fixed death benefit and premium structure. It’s ideal for those who want reliable and predictable policy. You decide how much coverage you need, and I shop for the best rate and terms
Pros:
-Lifetime coverage-no risk of outliving your policy
-It may have some cash value or return of premium provision
Cons:
-It’s more expensive than term
Cash Value Life Insurance
This is a versatile option that combines life insurance with a savings component. Cash value policies are governed by tax code 7702, which allow you to overfund the policy. The extra amount over the cost of the policy and cost of insurance are placed into a tax-advantaged account which accumulate interest. The goal is to have the smallest amount of life insurance that the government will allow you to have to maintain tax favorable handling of the account. This is because there is a cost associated with life insurance, so you want to keep your insurance cost as low as possible so you can over-fund the account to take advantage of the tax-free advantages.
How it works
Based on your budget, we structure the account with the smallest amount of life insurance the IRS will allow so the rest of the premium is applied to the cash value. When a premium is paid, the cost of insurance and cost of maintaining the account is deducted, and the remaining funds are placed into a separate account which grows and is credited with interest. As the cash value grows the death benefit also increases over time. The goal is to “max fund” this account so that over time as you fund the account the cost of insurance goes down. Over a period of time and once the account is properly funded, these funds can be “borrowed” without needed to go through underwriting or paying high interest costs. These loans can either be repaid or never repaid (amount is deducted from the death benefit upon death). Wealthy people who make too much money to qualify for contributing to a Roth often purchase cash value life insurance for the tax-advantages these accounts have.
Pros:
-Tax advantages (tax free growth, get loans from the account tax free, and tax-free death benefit.
-Buids financial safety net for retirement, business opportunities or emergencies
-Increases in value over time
Cons:
-Requires long-term commitment
-Higher initial costs
Ideal for: Those with higher budgets who want to combine protection and financial growth.
Finding the perfect fit: Every family’s needs are unique. For many of my clients, the ideal solution is a combination of term life insurance and cash value life insurance. Term insurance provides a robust, affordable coverage when it’s most needed, an often times term insurance is convertible to permanent if they can afford more permanent coverage in the future.
As your trusted financial guide, I am here to help you navigate these options. Whether you’re just starting a family, planning for retirement, or exploring ways to protect your legacy, I can craft a plan tailored to your goals.
