Combining Term and Permanent Life Insurance
There are two basic types of life insurance: Term and permanent. Term life insurance provides temporary insurance coverage for a specific term. There is no cash value in the policy, and the policy’s death benefit is paid only if you die during the term of the policy. Permanent (cash value) insurance is designed to provide lifetime protection, as long as you pay the premiums to keep the policy in force. At the outset, premium payments are usually higher than premiums for comparable term insurance. The increased premiums are used to provide a cash value that you can access if needed.
Caution: Any guarantees associated with payment of death benefits, income options, or rates of return are subject to the claims-paying ability of the insurer.
If you need a large amount of life insurance protection at an affordable price to cover short- or intermediate-term needs, term insurance may be the most appropriate option. On the other hand, if you will have an ongoing need for protection, or want the flexibility of building a cash reserve that you can borrow or withdraw from, permanent insurance may be the better choice. Term and permanent life insurance each have distinct advantages and disadvantages. So, it’s probably not surprising that sometimes the best option is to consider buying both.
Planning for a young family
Let’s say you and your spouse each plan to work for another 25 years. You determine that if either of you died, the survivor would need $250,000 to replace the lost income of the deceased spouse. One option to consider might be the purchase of a $100,000 permanent cash value life insurance policy and a $150,000 25-year term insurance policy on each of your lives. Using this approach, you can potentially:
Meet your need for income replacement now, largely with lower cost term insurance
Address a need for more permanent insurance later by converting some or all of the term insurance to permanent insurance without the need for further underwriting or new medical exams, and
Provide a foundation of permanent insurance that you will always have, and that will build cash values that you can use for future expenses (e.g., college funding or your retirement).
Planning for a child with special needs
If you’re the parent of a child with special needs, you might find that purchasing both term and permanent insurance can help provide the broad protection your family needs. For example, if you were to die prematurely, your family would probably need funds to pay off immediate debts and obligations and to replace your lost income; term insurance might be the most affordable way to provide a lump sum to cover those needs.
However, your child will have other financial needs (e.g., specialized medical treatment, schooling, residential programs, caregiving services) that will probably exist even after your death, and the death of your spouse. An additional permanent insurance policy–in this case a second-to-die policy, which would pay a death benefit upon the death of the last surviving parent–might provide the funds to meet these additional needs. And, because a second-to-die policy only pays a death benefit upon the death of the last surviving spouse, it generally costs less than buying individual life insurance policies for you and your spouse.
Typically, life insurance plays a role in funding a business succession plan (e.g., funding a buy-sell agreement that prearranges the sale of a partner’s interest upon death or disability). In this context, combining term and permanent insurance can be an efficient and economical solution. For example, individual term insurance policies can be purchased on the lives of each partner based on the current value of each partner’s share of the business, with coverage until retirement age. Permanent policies can be purchased to provide additional funds with the expectation that the business’ value will continue to grow. The permanent policies add flexibility, in terms of additional life insurance coverage, and cash value which can be accessed if needed (for example, to buy out a partner who retires before death).
Talk to an insurance professional
The insurance policy or policies that are right for you depend upon your financial circumstances. A life insurance professional can help you evaluate your insurance needs and recommend appropriate insurance products.