Life is precious, but also unpredictable. While you could be in the prime of your life, there’s always a chance that something unexpected could happen to you. That’s why many people choose to purchase protection, such as life insurance.
When it comes to buying life insurance, you are faced with two options – long term or short term. While we all have different circumstances, the decision ultimately comes down to what works best for you and your family. We’ll look at the pros and cons of permanent life cover to help you make an informed choice.
Why buy life insurance?
We never really know what could happen tomorrow. Think about it – if something were to happen to you suddenly, wouldn’t you want to leave behind some financial security for your spouse, children, or whoever else depends on you?
If you have a considerable amount of savings, you may not need protection. But for those who do not have substantial savings, life insurance can provide peace of mind knowing their loved ones will be financially protected in case of their death.
In addition, life insurance can also help cover funeral expenses and any outstanding debts or loans that are left to them. This can alleviate the burden on your family during an already difficult time.
What do we mean by permanent life insurance?
Permanent life insurance usually refers to ‘whole life insurance’. This type of policy provides cover for the rest of your life, as long as you continue to pay the premiums. Essentially, this means that the policy will pay out a cash lump sum no matter when you die.
The other option is term life insurance. However, with this policy, you agree to cover for a specific term, such as 10, 20, or 30 years. If you die within that term, your beneficiaries will receive the death benefit. If you outlive the term, the policy expires and no benefits are paid out.
Is it better to have permanent life insurance?
If you’re going to buy protection, it’s better to opt for permanent, right? Not necessarily. Instead, it depends on your situation and financial goals.
For example, if you are looking to protect your mortgage, you may only need cover for a certain number of years until the mortgage is paid off. In this case, term life insurance may be more suitable and cost-effective.
But if you’re looking at the bigger picture and want protection for the long-term, permanent cover may be the better option. That said, it naturally comes with its own share of pros and cons…
Permanent life insurance pros:
Lifelong Cover
One of the biggest advantages of permanent life insurance is that it provides cover for your entire life. So long as you keep up with those premiums, you can rest easy knowing that your loved ones will receive a cash lump sum when you eventually pass away.
Whereas with term cover, the policy only lasts for a set amount of time. Should you die during the policy term, your family will receive a cash lump sum. However, should you survive the term, your cover will expire. In which case, you may need to take out further cover if needed, which can be more expensive as you’re older.
Fixed Premiums
With permanent life insurance, your premiums are fixed for the life of the policy. This means that you won’t have to worry about premium increases as you age or if your health deteriorates. In this case, buying cover at a young age can be a smart financial move, as you lock in lower premiums for the long term.
Premiums are usually calculated based on factors such as:
- Age
- Health
- Occupation
- Family medical history
- Amount of cover needed
So for a young person, who’s healthy with a low-risk occupation and no family medical history, the premiums may be relatively low. Whereas someone who is older, has health issues, and a high-risk job may need to pay higher premiums.
Builds cash value
Another advantage of permanent life insurance is that it typically builds cash value over time. So you can borrow against the policy or even surrender it for a cash payout if needed. This can be handy if you no longer need cover but could use some extra cash for emergencies or other financial needs.
In most cases, cashing in the policy will mean you won’t receive the full amount. Instead, policies typically have a surrender value where there is a penalty for cashing in early. Cancelling/cashing in the policy can be risky as you no longer have protection, so make sure this is the best decision for you before doing so.
Permanent life insurance cons:
Higher premiums
One of the main drawbacks of permanent cover is that it typically comes with higher premiums compared to term. This is because the policy provides cover for your entire life, rather than just a set term. If you are on a tight budget, the higher premiums may make permanent cover less affordable.
Complexity
Permanent life insurance policies can be more complex than term policies, with different options and features to consider. This can make it difficult to fully understand the policy and its benefits, which may lead to confusion or misunderstandings down the line.
For example, some whole life policies offer an investment component, where part of your premiums are invested and can potentially grow over time. For some people, this can be a beneficial feature, but for others it may not be necessary or suitable.
Less flexibility
Another thing to consider when deciding between permanent and term life insurance is the level of flexibility you have with your policy. With permanent life insurance, you are locked into the policy for your entire life. This means that you may not be able to adjust your coverage amount or premium payments as easily as with a term policy.
On the other hand, term life insurance offers more flexibility in terms of coverage length and premiums. You can choose a policy that aligns with specific financial goals or milestones in your life, such as paying off a mortgage or until your children have grown up.
Conclusion
So, which type of life insurance is right for you? Well, it really depends on your individual needs and financial goals. If you’re looking for affordable cover for a specific period of time, then term life insurance might be the way to go.
However, if you’re interested in long-term financial planning and building cash value over time, then permanent life insurance could be worth considering.