Term vs permanent life insurance, plainly

Two products share the name "life insurance" and work almost nothing alike. Nearly all the confusion — and most of the bad feeling people carry about being sold to — comes from that.

Term life insurance

You choose an amount and a length: say, coverage for twenty years. If you die during those years, your beneficiaries receive the amount. If you don't, the policy ends and nobody gets anything.

That sounds like a bad deal until you notice it's how all your other insurance works. Your car insurance doesn't pay you back for a year of not crashing.

Because it's temporary and most policies never pay out, term is much cheaper for the same coverage amount — often by a large multiple. It's the straightforward answer to a straightforward problem: something would go badly wrong for people who depend on me if I died in the next fifteen years.

It tends to fit when: you have a mortgage, children at home, a working spouse who'd struggle on one income, or a business partner. All situations with a natural end date.

Permanent life insurance

Permanent policies are built to last your entire life rather than a term of years, and part of what you pay accumulates as a cash value you can borrow against or withdraw. There are several kinds — whole life, universal life, indexed universal life — that differ mainly in how that cash value grows and how flexible the premiums are.

You're paying for two things at once: coverage that doesn't expire, and an accumulating value. That's why the premium is so much higher for the same death benefit.

It tends to fit when: you have a need that genuinely doesn't end — a lifelong dependent, an estate that will owe taxes, a business that needs funding at your death — or when you've already filled the more tax-advantaged places to put money and want another one.

Final expense

A third category worth naming: permanent policies for much smaller amounts than a traditional one, aimed specifically at funeral and burial costs.

The point isn't wealth transfer. It's that a funeral is a real bill arriving in a week when nobody in your family is in any state to deal with it. These policies usually have simplified health questions, which matters if your health would make other coverage difficult.

How much do you actually need?

Start from what would need paying for, not from a rule of thumb:

• What debts would remain, including the mortgage?
• How much income would need replacing, and for how many years?
• Are there education costs still ahead?
• What would a funeral realistically cost?
• What's already there — savings, a work policy, Social Security survivor benefits?

Add the first four, subtract the last, and you have a defensible number rather than a multiple someone quoted at you.

What to do next

If you already have a policy, dig it out. A surprising number of people have coverage through work they've forgotten about, a policy whose term is quietly about to end, or a beneficiary listed who they'd no longer choose. That review costs nothing and is worth doing before you buy anything new.