Combining Term and Permanent Life Insurance: Why Not Have It All?

If you’re looking for life insurance, you’ve likely already wondered: do I need term or permanent life insurance? This decision forces many people to choose between these two types of policies. However, the most clever option might be to have it all: combine term insurance with permanent insurance.

In this article, we will explain the best strategies for combining these two types of insurance and getting the most out of their benefits. Find out how to set up this insurance combination to enjoy the best coverage at an affordable price.

Combining Term and Permanent Life Insurance: Why Not Have It All?
Combinar seguro temporal y permanente | Foto: GETTY IMAGES

Combining Term Insurance with Permanent Insurance: Article Contents

Term Insurance and Permanent Insurance

Remember, you don’t need to choose between term and permanent insurance. If you’re looking for insurance, or already have it, you don’t necessarily have to settle on a single option. You can combine term insurance and permanent insurance to build the coverage strategy that best suits your needs.

Having both options is the best of both worlds. You can enjoy the low prices of term insurance and the extensive coverage and ability to generate cash value associated with permanent insurance.

Term insurance, also known as temporary insurance, is a type of policy that is purchased for a set period of time. It can be valid for 5, 10, 15, 20, 25 or 30 years, and if the insured dies while the policy is in effect, their beneficiaries will receive the payout. As it is a short-term policy, insurers take on less risk: they expect the insured to outlive the policy. This lets insurance companies offer lower prices for premiums. What’s more, the application process for obtaining one of these policies is simpler, because the companies take less precautions in granting them.

Permanent insurance, on the other hand, does not have a set duration: it remains in effect for the entire life of the insured, as long as they continue to pay their premiums. Unlike term insurance, these policies are more expensive, but also offer more extensive and higher coverage. Furthermore, these policies are associated with investment components that use part of the money from the premiums to generate profits. This money is accumulated as cash value, capital that the insured can use to apply for loans or withdraw as cash, for example.

These components make permanent insurance an attractive option, because it can function as a savings tool that also provides significant death benefits.

However, the premiums are much higher and, most importantly, the qualification process is complex and very demanding (except in cases of group insurance and guaranteed issue insurance).

There are many types of permanent insurance, depending on their complexity and the degree of commitment required from the insured. There is ordinary or traditional life insurance, universal life insurance, variable life insurance, and variable universal life insurance.

Typically, you can choose between any of these options, but more and more people are looking to combine term insurance with permanent insurance, especially the traditional type.

Why You Should Combine Term Insurance and Permanent Insurance

The possibility of joining these two types of insurance is very attractive--most of all because it allows you to pay moderate prices and have high coverage at the same time.

Combining these two policies can be a good solution in several cases:

  • People who can’t pay more. Permanent insurance with high coverage is expensive. In this case, you can opt for permanent insurance with moderate coverage, which will be more affordable, and top it off with term insurance, also inexpensive, which can be used to supplement the death benefit. This option is very attractive for young, low-income families: permanent insurance generates savings for the future and term insurance offers extra protection in the case of the sudden death of the household’s breadwinner.
  • Extra coverage for a set period of time. If you already have permanent insurance, you may find that you need to up your coverage for a certain period of time to guarantee that your beneficiaries receive more money than initially calculated if you die. In this case, an extra term policy can provide greater coverage during the years in which the policy is in effect. This is an interesting option for increasing your family’s protection during difficult times, such as your children’s school years or while you’re paying off your mortgage. Once this period of increased need is over, you can get rid of the term insurance.
  • Expanding coverage. Once their financial situation improves, many people who have term insurance realize that they can dedicate more money toward their policy. In this case, they can add permanent insurance, which offers greater coverage, to their product portfolio.
  • “Laddering” strategy. Laddering strategies combine various types of term insurance so that they supplement each other. By overlapping, they provide higher payouts with a reduced cost in premiums. In many cases, these strategies include permanent insurance with low coverage.
  • Supplementing with group insurance. One common option is group life insurance, which is generally permanent. However, it offers low coverage, so it’s a good idea to supplement it with other insurance, such as term insurance.
  • Getting past the qualification process. Combining life insurance can also be a good strategy if you have difficulties getting past the application process. In this situation, it’s always easier to purchase term insurance, which you can later supplement with low-coverage permanent insurance, group insurance, or guaranteed issue insurance. This last option is more expensive, but it allows you to have permanent insurance.

As such, there are many possibilities out there. If you’re in one of these situations, consider combining two types of insurance. If you do, remember that the type of permanent insurance experts most recommend for these combinations is traditional or whole life insurance. This type is the simplest and requires less of your attention.

Advantages of Combining Term and Permanent Insurance

There are many advantages to combining insurance. Some of the most significant benefits are:

  • Better pricing. As we’ve seen, the right combination of term and permanent insurance offers good coverage without sky-high premiums.
  • More flexibility. Having multiple products means more flexibility in managing them. You can make changes to them depending on your circumstances, adapting the policy that offers the most advantages. If you only have one policy, it’s difficult to adapt it to the changes in your life.
  • Less complications during qualification. If you build a life insurance strategy with inexpensive, low-coverage products, it will be easier to pass the initial qualification process. It’s always easier to apply for life insurance if the policy is inexpensive.
  • No limit on policies. With combination strategies, as with laddering, you can combine as many insurance policies as you want. Furthermore, these policies can come from one or multiple insurers. And, of course, they can all be reviewed and, in the case of term insurance policies, converted to permanent insurance. But you should also be aware that if you have multiple policies, the insurer may consider your ability for pay for all of them, creating additional hurdles for you in the qualification process.

As you can see, there are many possibilities out there. Combining policies gives life insurance a variety of options you won’t always have when you opt for a single product. However, it can also make these policies more complicated to manage and understand. As such, you should ask your insurance agent for more information to better understand how life insurance that combines term and permanent insurance works.

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