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Commentary: Understanding the Basics of Term and Permanent Life Insurance

September is nationally recognized as Life Insurance Awareness Month, making this the perfect time to provide an overview of the options available in the life insurance marketplace.

Bruce Helmer and Peg Webb, financial advisers at Wealth Enhancement Group and co-hosts of “Your Money” on KLKS 100.1 FM on Sunday mornings.
Bruce Helmer and Peg Webb, financial advisers at Wealth Enhancement Group and co-hosts of “Your Money” on KLKS 100.1 FM on Sunday mornings.

September is nationally recognized as Life Insurance Awareness Month, making this the perfect time to provide an overview of the options available in the life insurance marketplace.

There are essentially two types of life insurance: term and permanent. Each has their own costs and benefits you need to be aware of when making the final decision of what type of policy to purchase.

Term

Term policies provide benefits only during a set period of time, and chances are you likely won't see any benefits from the policy. Only about 2% of term policies pay out according to industry groups. If a guaranteed payout is something you're looking for when purchasing life insurance, you should probably lean toward a permanent policy. What term lacks in guaranteed benefits, it makes up for in affordability; term policies tend to be about 5-10 times less expensive than a comparable permanent policy.

When deciding how much term coverage to purchase, the general rule of thumb is 10 times your current salary. This amount of coverage may provide adequate coverage, but you shouldn't necessarily solely use this as your benchmark for purchasing coverage. A better strategy is to calculate how much income would need to be replaced should you or your spouse pass on.

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Don't forget to insure stay-at-home parents as well. Calculating how much coverage a stay-at-home parent needs can be difficult to quantify, but it's recommended to purchase no less than $250,000 in coverage.

Permanent

Contrary to a term policy, owning a permanent policy will last throughout the duration of your life. This means that your policy will pay out at some point in the future. One reason that permanent policies have much higher premiums is that a portion of those premiums go into a saving component within the policy known as cash value. The cash value on a permanent life insurance policy can be used for expenses while you're still alive, making it a much more flexible option than a term policy.

There are a number of different permanent life insurance policies available, but perhaps the two most common types are whole and universal.

Whole

Whole life insurance is the most basic form of permanent life insurance. Your premiums will remain the same each year while you'll get the security of knowing the policy will pay out death benefits in the future. Furthermore, the cash value can be used to help cover premium costs. Because of these perks, whole policies can be expensive, but in the right situation, they may provide enough value to justify the costs.

Universal

Universal coverage is more versatile than whole life insurance. You'll have the option to reduce or increase the amount of death benefits on the policy, as well as flexibility regarding the size of your monthly premiums. Universal policies tend to be cheaper than whole policies; if the premium on a whole policy is more than you're looking to pay, universal life can provide an affordable alternative for purchasing permanent life insurance coverage.

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There are a number of factors you'll need to contemplate before deciding which type of policy is best for you. Speaking with your financial advisor can help you identify what you want to get from a life insurance policy and which one will best help you reach your long-term goals.

Guarantees are based on the claims paying ability of the issuing company.

By Bruce Helmer and Peg Webb are financial advisers at Wealth Enhancement Group and co-hosts of "Your Money" on KLKS 100.1 FM on Sunday mornings. Email Bruce and Peg at yourmoney@wealthenhancement.com . Securities offered through LPL Financial, member FINRA/SIPC.

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