Can you have both term and permanent life insurance?

Life insurance is a vital financial resource to protect and keep you and your loved ones at peace. Typically, people tend to treat life insurance just like a two-way street: term and permanent. But there’s more complexity than that. You are not bound to one at the cost of the other. Ideally, take both, the terms and permanent life insurance, so that you are insured suitably to safeguard yourself and your family. 

Let us understand how to combine term and permanent life insurance, how they complement each other, the benefits of this hybrid product, and whether it suits you. It’s easier to appreciate how these two kinds of insurance can complement each other if their fundamental difference is understood.

Term life insurance

Term life insurance is paid for a number of years, typically 10, 20, or 30 years. Usually, the aim is to provide much-needed coverage for those pivotal years for purchasing a house, educating children, or financing other major obligations.

Key features:

• Lower Premiums
• Coverage for a fixed term
• No cash value or investment component
• Best suited for short-term financial liabilities

Whole life insurance

Permanent life insurance provides coverage for the whole lifetime of an individual, so long as premiums are paid. In addition, permanent life insurance policies have a cash value component that grows over time and allows for tax-deferred savings. Examples of permanent life insurance include whole life, universal life, and variable life policies.

Key features:

• Lifetime coverage
• More expensive
• Accrual of cash value
• Suitable for long-term financial goals, such as estate planning or legacy building

Why combine term and permanent life insurance?

While term and permanent insurance serve different purposes, they can be combined to create a comprehensive and flexible financial plan. Here's how:

1. Address different needs simultaneously

If your requirements include temporary obligations like mortgage payments, or higher education, better to choose term insurance. Permanent insurance, on the other hand, best ensures goals, namely, the fulfillment of lifetime financial goals: be they the remainder left over, or the estate taxes to be paid. Taking both of them together is a technique to cope with needs, both short term and long term.

2. Balancing affordability and security

A hybrid approach will allow you to ensure affordability while getting lifetime coverage. A term policy with a larger term and a more negligible permanent policy will ensure that one gets sufficient protection without over-stretching the budget.

3. Modifications in life isolation

Life is unpredictable and financial responsibilities will change over time. A term and permanent insurance combination provides versatility, enabling one to change cover as their needs will change. You can let the term policy expire once your mortgage is paid for, while still retaining your permanent policy for a lifetime of protection.

Advantages of term and permanent life insurance

Cost efficiency

Term insurance is relatively inexpensive. You can obtain a good sum of coverage in critical periods relatively affordably, supplementing that with a much cheaper permanent policy so you could have the advantages of both policies without the stratospheric expense of a big permanent policy.

Lifetime coverage

Permanent insurance allows you to keep coverage in effect for life; this is vital for long-range goals, like providing an inheritance or paying expenses at the end of your life.

Cash accumulation

With permanent insurance, funds can always be drawn, representing a form of liquidity when something comes up suddenly, which often happens or providing for a much-needed retirement; this isn't possible with term insurance.

Tax benefits

Permanent life insurance is usually tax-deferred for the cash value growth, making it have many more added benefits in comparison. It will always be tax-free on death.

Flexibility

A hybrid approach enables you to personalize your coverage based on your unique needs and circumstances. You may choose term lengths and permanent policy types that meet your financial objectives.

Let us look at some real-life scenarios where combining both options makes sense:

Young families: A young couple with children may purchase a term policy for significant expenses like a mortgage and college tuition, and a smaller permanent policy to generate cash value for lifelong coverage.

Business owners: A business owner could use term insurance to pay off the business loan and have a permanent policy for key person insurance or fund a buy-sell agreement.

High Net Worth Individuals: For those having large estates, a permanent policy can help with estate tax planning, while a term policy can fulfil immediate financial obligations.

How to structure your hybrid policy

Assess your financial needs: Start by considering your current and future financial responsibilities. This can include outstanding debts, family expenses, retirement plans, and legacy goals.

Determine coverage amounts: Calculate how much coverage you need for term and permanent insurance. A financial advisor can help you strike the right balance based on your budget and objectives.

Choose the right term length: Select a term length that aligns with your temporary financial responsibilities. For example, if you have a 20-year mortgage, a 20-year term policy might be appropriate.

Select a permanent policy type: Decide which form of permanent life is most beneficial to you. A whole life offers a certain type of guaranteed growth in the form of cash, whereas an ordinary universal policy does not limit itself in payment by premium but by death benefit either.

Evaluate and update frequently: As circumstances change, it’s essential to evaluate and change the policy depending on the condition and need at that time.

Things to keep in mind

While combining term and permanent life insurance has many other benefits, there are some adverse implications you should be aware of:

Higher costs: Permanent insurance is relatively much costlier than term insurance. Combining both can squeeze your wallet if not planned carefully.

Complexity: Handling multiple policies can be more complicated than managing one policy.

Overlapping coverage: You may end up with redundant coverages if not planned properly, which can result in unwarranted expenses.

Are term and permanent insurance right for me?

You decide to blend term and permanent life insurance. Your circumstances, goals, and current financial situation dictate your decision. Consider these questions.

Do you have short-term and long-term financial obligations? Are you financially capable of paying for the premiums with this hybrid product? Are you looking for flexibility in coverage of a term or permanent product?

Do I consider the cash-value growth and permanent security of an insurance plan during my lifetime?

If you agree with the last two questions, a hybrid of term and permanent insurance should be part of your strategy, too.

Adding term and permanent life insurance strikes a balance and provides strategic use of your money in planning. This implies addressing immediate financial needs while being covered over a lifetime and creating money for cash value in the future. To establish a direction for a clear and tailored life insurance plan that enables trust in both you and loved ones, you have to be aware of your specific circumstances and consult qualified financial advice.

Remember, life insurance isn't a one-size-fits-all solution. A hybrid approach will ready you for a life full of uncertainty as well as help you secure long-term financial objectives.

The views and opinions expressed in this article are those of the author and do not necessarily reflect the views of YourStory.