Life Insurance 101: Term vs. Permanent – What You Need to Know
Life insurance is a critical component of financial planning, yet it often feels overwhelming due to the many policy options and factors to consider. In this Cash Podcast episode, financial expert Adam Koós and insurance professional Dan Brookman break down the key elements of life insurance, including term and permanent policies, how to determine the right coverage and special considerations for business owners.
How Much Life Insurance Do You Need?
The most common question about life insurance is: How much coverage do I need? Dan recommends using the LIFE acronym to calculate coverage needs:
- L – Liabilities: Mortgage, student loans, credit card debt, or other obligations.
- I – Income Replacement: The industry standard suggests replacing at least 10 years of income.
- F – Final Expenses: Funeral and burial costs, typically $15,000 to $30,000.
- E – Education: Funding for children’s college tuition if applicable.
Individuals can estimate their total coverage needs and subtract any existing insurance to determine additional required coverage using these factors.
Term vs. Permanent Life Insurance
Term Life Insurance: Cost-Effective, Temporary Coverage
- Best for: Young families, new business owners, or those needing high coverage at a low cost.
- How it works: Coverage lasts for a set period (10, 20, or 30 years). If the policyholder passes away within this period, the benefit is paid.
- Downside: No cash value accumulation and coverage expires if not renewed.
Permanent Life Insurance: Lifelong Protection
Permanent life insurance is more expensive but provides lifelong coverage with an investment component. There are several types:
- Whole Life Insurance:
- Guaranteed death benefit, fixed premiums, and a cash value component.
- Best for those seeking stable, long-term protection.
- Universal Life Insurance:
- More flexible premiums and death benefits, with interest-based cash value growth.
- It can be tailored for estate planning or long-term financial needs.
- Variable & Indexed Universal Life Insurance:
- Tied to market performance (variable) or indexes (indexed universal).
- Growth potential, but also some risk depending on market conditions.
- Guaranteed Universal Life Insurance:
- Functions similarly to term insurance but lasts a lifetime.
- No significant cash value accumulation, just coverage until age 90, 100, or beyond.
Life Insurance for Business Owners
Business owners often require additional life insurance considerations, including:
- Key Person Insurance: Protects a company if a critical employee or owner passes away.
- Buy-Sell Agreements: Ensures a smooth ownership transition in case of a partner’s death.
- Business Valuation for Insurance Planning: Helps determine the appropriate level of coverage to fund ownership transitions.
Group Term Life Insurance: Pros & Cons
Many employers offer group life insurance, which provides coverage at little to no cost. While beneficial, it comes with risks:
Pros: Affordable, easy to obtain, no medical exam required.
Cons: Coverage is lost if employment ends, and benefits may not be sufficient.
Experts recommend using group insurance as supplemental coverage rather than the primary policy.
Can Life Insurance Be a Retirement Savings Tool?
Some high-net-worth individuals use Life Insurance Retirement Plans (LIRPs) as an additional savings vehicle. However, this strategy only makes sense for those who:
✔ Have maximized 401(k) and IRA contributions.
✔ Maintain a strong financial position with additional investable income.
✔ Can commit to funding the policy for 10+ years without interruption.
For the average individual, traditional retirement accounts and brokerage investments are more efficient savings tools.
Final Thoughts: Choosing the Right Life Insurance Policy
To ensure a solid life insurance strategy:
- Work with an independent professional who has access to multiple carriers.
- Review policies every 3-5 years as life circumstances change.
- Ensure coverage aligns with financial goals and family needs.
If you need help evaluating your current life insurance or determining the right policy for your needs, visit LibertasWealth.com for expert guidance.