Term or permanent life insurance: start with what the plan requires

A client asks for a million dollars of life insurance. Before comparing term and permanent coverage, identify what that amount is meant to protect and how long the obligation is expected to last. The answer establishes the amount and duration to compare.

Calculate the need before comparing products

Life insurance can help replace income, repay debt or fund an obligation that continues after the insured dies. Each purpose leads to a different estimate of the amount needed.

Estimate the expenses and income shortfalls a death would create, including debts, housing, education and final expenses. Then identify the resources available to meet them: existing coverage, accessible assets, survivor earnings and any applicable Social Security benefits. An income multiple can be a rough comparison, but it cannot account for all of those details.

In the needs calculation, keep obligations and available resources from being counted twice. For example, if the mortgage will be paid off from the death benefit, the ongoing income estimate should not also include that same mortgage payment.

Compare premiums with other uses of the money

Once the need and duration are defined, compare the premium, guarantees, flexibility, cash value if any, and the consequences of changing or ending the policy. Plain term may provide more initial death benefit per premium dollar than whole life for the same applicant, but the actual offer depends on underwriting and contract design.

The higher premium also changes what the client can fund elsewhere. CFP Board’s guidance on life insurance recommendations includes considering whether a client could benefit more from another use of the money, such as obtaining an employer retirement-plan match. Compare those alternatives even when the client can afford the permanent policy.

Match the term length to the exposure

Term insurance is most straightforward when a coverage need has a definable end date. A 20- or 30-year policy can be sized to a mortgage payoff, a youngest child reaching financial independence, or the point at which the household expects to have enough assets to meet the need without insurance. Once the liability expires or the assets are sufficient, the insurance need may shrink or disappear.

Also test a slower decline in the need. If additional coverage is required later, age, health and the products then available can change the offer.

When permanent coverage fits the plan

Permanent life insurance addresses a different set of objectives, usually ones where the coverage need has no natural expiration.

Estate liquidity, lifelong support, charitable goals, and business succession can create needs that do not end with the working years. Trust ownership, special-needs planning, business agreements, beneficiary design, and tax treatment require qualified legal and tax advice. Choose the legal structure before treating a policy as the solution.

Some term policies include a conversion privilege that permits eligible coverage to become permanent without new evidence of insurability. That option may matter after a health change, but it does not guarantee access to every permanent product or today’s premium. Record the deadline and eligible products before relying on it.

Read the guarantees separately from the projections

Universal-life illustrations distinguish guaranteed values from projections based on non-guaranteed assumptions. Ask which premium schedule supports the intended coverage duration under each set of assumptions. If the policy has a separate no-lapse guarantee, confirm its conditions and whether the proposed funding meets them.

Review charges and the effects of any planned loans or withdrawals. The illustration can help compare how a policy may perform under different assumptions; it cannot promise that the current assumptions will continue.

This article is general information only and is not financial, tax, or legal advice. Product availability, features, costs, and outcomes vary by carrier and by individual circumstances, and any coverage is subject to underwriting and policy terms. Consider working with your financial, tax, or legal advisor. Our role is to help implement appropriate coverage, not to replace that advice.