Term life. Whole life. Universal life. Permanent life. Surely you’ve heard these terms before, but now that you’re ready to buy life insurance, you’ll need to understand what they all mean.
There are hundreds of different life insurance policies to choose from. Some will cover your final expenses while some will leave a death benefit for your children or spouse. Others offer a way to generate tax-free income in retirement.
Term life is the most straightforward policy you can buy — your beneficiaries collect a death benefit if you die before the end of your term period. But there’s one question that everyone has about term policies:
What happens if I outlive my life insurance?
From the benefits to the cost to the tax implications, here’s our look at term vs. permanent: a physician’s life insurance comparison guide.
Do Physicians Need Life Insurance?
Life insurance is an essential measure of protection for anyone who has dependents. As a high-income physician, you are likely to be the breadwinner of the family and have people who rely on your salary.
Life insurance protects your family, as you can leave your death benefit to your spouse, children, or other beneficiaries.
But there’s more to life insurance than just leaving someone money when you die. Life insurance can double as an investment tool, as well.
You can use life insurance to make a charitable donation to a cause you care about. You can use a life insurance trust for estate planning purposes, so your beneficiaries don’t have to pay estate taxes when you die.
You can use it as a vehicle for wealth accumulation that allows you to enjoy tax-free benefits in retirement. You can also use it to buy and sell a business partner’s interest in a shared business.
Life insurance is useful in many capacities, but how you can use it depends on the type of coverage you have.
The design for term life policies is quite different than permanent life insurance plans.
What Is Term Life Insurance?
Sometimes called pure life insurance, term life insurance is relatively easy to understand:
You pay X amount per month for X amount of coverage for X amount of years. You’ll pay a 20-year term life insurance policy for 20 years, a 30-year term policy for 30 years, etc. If you die within the term, your beneficiaries will collect your death benefits.
The Pros of Term Life Insurance
People love term life insurance for a few reasons. For one, it’s straightforward and easy to understand. It also costs less per month than permanent life insurance, which lasts your entire life.
With term life, premiums and payouts remain the same throughout the entire term if you have a fixed premium rate. If you have an annual renewable term, you can expect increasing rates as you age.
Many term life policies allow for conversion to permanent life policies, which come in many varied designs to build different types of financial security and wealth. However, most insurance providers require you to convert your policy within a specific amount of time.
The benefit of a limited conversion period is that you won’t have to go through any additional health screens or medical exams. However, the downside is that you may have to decide to convert within the first few years of your policy.
As long as your policy has a conversion option, you can usually switch to a permanent policy even if you are currently not insurable due to an adverse change in your health.
The Cons of Term Life Insurance
The biggest downside to term life insurance is that your period of fixed premiums has an end date. If you die within the term period, your family gets your benefit. But if you die after the term policy ends, your family gets nothing if you don’t extend the policy.
The only way to give your family your death benefit is to extend the term by shifting to what is often called “annual renewable term.” And when you do this, your rates will skyrocket. In a short amount of time the rates will increase so dramatically it is virtually impossible to pay. The only way a policyholder would continue to pay the exorbitant rates is if you have a short amount of time left to live and financially it is worth it to keep paying to ensure your family gets access to the life insurance payout.
Monthly premiums with term life insurance are cheaper if you stick to your fixed term. But in the long run, term insurance is much more expensive than permanent.
Because unless you extend the term, your beneficiaries get $0. This means you just wasted all that money paying monthly insurance premiums every month throughout your 10, 20, or 30-year term.
Related Reading: The Complete Guide to Physician Retirement Planning.
What Is Permanent Life Insurance?
Permanent life insurance comes in many different forms and designs. Permanent life insurance is an umbrella term. It covers five different types of life insurance: whole life, universal life, adjustable life, variable life, and indexed universal life.
Whole Life Insurance
Whole life insurance lasts your whole life. It doesn’t matter when you die — when you do, your family will get your death benefit.
Whole life also acts as a savings account that accumulates cash value over time. You can invest that cash value, withdraw it, or borrow against it, depending on your needs. You can collect cash value in a whole life insurance policy simply by paying more than the minimum due every month.
Universal Life Insurance
Universal life insurance is whole life insurance with an investment component built into your monthly premiums. Beneficiaries will receive the death benefit when the policyholder dies. Further, the policyholder can access a portion of their cash investment account while still alive.
Adjustable Life Insurance
Adjustable life insurance combines elements from term life and whole life. With a flexible policy, you can adjust the different features of the plan, such as the period of time and monthly premiums. Like whole life and universal life, it too builds cash value.
Variable Life Insurance
With a variable life insurance policy, you can decide where to invest the cash value of your account. As your cash value grows, so do your investments in the securities you’ve chosen to take a stake in. If the market goes up, you’ll have a more of a return on your investment.
Indexed Universal Life Insurance
Indexed universal life insurance also has a cash value component. But in this scenario, the money in your cash account earns interest based on the stock market interest. Some insurance companies use the S&P; some use the NASDAQ index.
Either way, most insurance companies have contracts that have caps on returns, but not all. This policy offers more potential for more growth in your cash account but it still may have more risk than whole life or universal life.
Whole life insurance is the safest permanent life insurance investment you can make. The other forms and designs come with more significant performance potential and cash accumulation, but higher risk.
If the concept of permanent life insurance seems a bit confusing, that’s because it can be. There are even more specific contracts available within each of those, so it’s best to speak with a financial advisor to determine which option is right for you.
The Pros of Permanent Life Insurance
The biggest pro of permanent life insurance is that it has no end date. Your beneficiaries will collect your death benefit no matter when you die.
Regardless of the specific type of life insurance you choose, permanent life insurance works as follows:
You pay X amount in monthly premiums for X amount of coverage for the rest of your life. If you contribute more than your monthly premiums, the excess contribution will accumulate cash value in a cash account.
A big benefit of permanent life insurance is that cash value accounts are tax-deferred. You won’t pay taxes on the money while it’s accumulating and, if you hold the account until its maturity date, you can borrow against that cash value tax-free.
If you want to end your life insurance coverage at any point, you can surrender the policy for cash. However, you will be subject to paying taxes on any earnings or gains realized.
The Cons of Permanent Life Insurance
With a permanent policy, traditionally you’ll pay the same monthly premium every single month until you die. The only way around this is to accelerate the funding schedule and pay it all in the first year or over the first five years. Some insurers allow you to pay it over the course of ten years.
The time period you choose will affect how much you’ll pay and for how long. The more you pay early on, the better your cash accumulation will be.
One other drawback to permanent life insurance is that it can be five to fifteen times more expensive than term life. Especially during the fixed-rate term years. However, term rates do increase if you decide to extend the policy beyond its term which makes them much more expensive in the long run.
But perhaps the biggest downside is that there are simply other ways (and potentially better ways) to invest your money. Speak to your financial planner to decide what’s right for you.
What Kind of Life Insurance Should You Get?
There is only one main reason to choose a term policy:
- You only want coverage for a certain amount of years, such as the duration of your mortgage or until your children turn a certain age
There are multiple reasons why you should choose a permanent life insurance policy:
- You want your life insurance policy to double as an investment vehicle
- You want to leave X amount of money to your children, spouse, or heirs to pay inheritance taxes or estate taxes
- You have a lifelong dependent (such as a child with special needs)
- You want to ensure your family has cash on hand for your final expenses and funeral costs
- You’re looking to accumulate tax-free wealth and income
- You want to be able to sell your portion of your business to your business partner
- You want to use it to make a charitable donation.
Before you choose a policy, speak to a financial planner and/or a tax planner to learn the best ways to make your money work for you.
The Key Features to Look For in a Policy
One of the first things to consider when choosing a policy is the maximum coverage amount. Some policies have limited benefit amounts, so be sure to select a plan that can meet your coverage needs.
If you choose a term policy, make sure that it can convert to a permanent policy at a later date. Without this built-in option, you’re only limiting yourself to the varied options available.
The other thing to look for is affordability. Can you afford the policy you want or think you need?
You’ll need to decide if the monthly insurance premiums are worth investing in this manner or if there are better, sounder investments you can make.
How Much Life Insurance Do You Need?
Not sure how much life insurance you need? Most experts recommend that your policy payout at least 20 times your income.
To determine how much coverage you need, total up your monthly expenses and debt. Then multiply that by the number of years that you want to be able to cover the costs for once you’re deceased. Subtract your liquid assets from that figure. The amount remaining is the gap you’ll want to cover with a life insurance policy.
How to Manage Your Life Insurance Policy?
Regardless of the type of policy, prepare to manage it, and make adjustments as your income and financial situations change.
With a term policy, you’ll need to decide if you want to renew it when the term is up. Keep in mind that as your age and health decline, you can expect your premiums to soar well above your initial level term fixed rate.
It’s also important to think about converting a term policy to a permanent policy for additional coverage. Depending on your insurer, there may be time constraints on this.
With a permanent policy, you’ll need to decide if you want to cash it out, borrow against it, or use your cash accumulation to make more investments. You’ll also need to be conscious that, at some point in your life, there may be better ways to spend or invest your money.
Which Life Insurance Company Offers the Best Policies?
There are dozens of quality life insurance options and providers in the market. Lincoln Financial, John Hancock, Prudential, Penn Mutual, Nationwide, and Principal. These are just a few of the insurers that we work with to get you the best rates and plans.
Which Is Better: Term Life Insurance or Permanent Life Insurance?
Overall, permanent life insurance has much more to offer. It provides more flexibility and better coverage. Not to mention the opportunity to accumulate cash that you can invest or withdraw and spend while still living.
But, your financial goals will determine the best policy for you. Before selecting, consult with a specialized physician financial planner to weigh your options. You’ll learn how to build more wealth and provide financial security for your loved ones through life insurance options.
Ready to choose a life insurance policy? Contact Physicians Thrive now for more guidance or to compare quotes from top-rated providers.
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