Home Life Insurance Financial counselors typically recommend term life insurance, but most consumers choose another...

Financial counselors typically recommend term life insurance, but most consumers choose another type.


Life insurance may be purchased in two forms: term and permanent. Whole life and universal life are included in the latter group.

According to financial gurus, term life insurance is often the best option for most people since it is the most cost-effective.


According to the American Council of Life Insurers, 60% of plans sold in 2021 will be permanent, while 40% will be term.
There are two types of life insurance, and evidence reveals that many households are not purchasing the more cost-effective one. According to the latest recent data from the American Council of Life Insurers, Americans acquired 4.1 million term insurance plans in 2021, accounting for 40% of all individual policies purchased that year. Permanent life insurance accounted for around 6.3 million policies or 60% of all plans.

However, this appears to contradict the conventional advice of financial gurus.


“Most people just need term insurance,” said Carolyn McClanahan, a licensed financial planner and member of CNBC’s Advisor Council headquartered in Jacksonville, Florida.

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What is the difference between term and permanent life insurance?

Life insurance is a type of financial protection that pays out money to beneficiaries, such as children or a spouse, if the policyholder dies.

Term insurance only pays out a death benefit for a set period, such as 10, 20, or 30 years. After that period, unless renewed, the coverage expires.

Permanent insurance plans, on the other hand, such as whole life and universal life, provide ongoing coverage until the policyholder dies. Because they feature interest-bearing accounts, they are also known as cash-value insurance.
Permanent insurance is often more expensive, according to advisers. Policy premiums are paid over a longer period, and the proceeds are utilized to meet insurance expenses and accumulate cash value.

“Term insurance will probably be the most cost-effective way to address survivor income needs, especially for minor children,” said Marguerita Cheng, a CFP in Gaithersburg, Maryland, who is also a member of CNBC’s Advisor Council.

Premiums might vary widely across individuals. They are determined by insurers based on the face value of the policy as well as the policyholder’s age, gender, health, family medical history, occupation, lifestyle, and other criteria.

Why you might need permanent life insurance

According to McClanahan, founder of Life Planning Partners, there are three key reasons why purchasing permanent coverage may make more sense, despite the higher premiums. This would try to assure that an insurance benefit is made upon death, regardless of when it occurs.

Some beneficiaries, like children with special needs, may require financial assistance for an extended period, and a policyholder’s lifetime assets may not be sufficient to meet their needs, according to McClanahan.

Some policyholders may also choose to leave a financial legacy to family or charitable organizations. Furthermore, some may have a small health issue that has the potential to deteriorate in the future. At that moment, the policyholder may be uninsurable, in which case it would be advantageous to get a permanent policy now to secure coverage later, according to McClanahan.
Some customers purchase permanent life insurance for the cash value, believing they may borrow against it or utilize it as a retirement savings account. However, it is a “horrible reason” to get a permanent policy, according to McClanahan, who adds that the primary purpose for purchasing a policy is always for an insurance need.

For example, there may be taxes and penalties if the cash value of insurance is accessed. Withdrawing or borrowing too much money from a permanent policy may mistakenly cause the policy to lapse, resulting in the owner losing their insurance.

Policyholders should instead use the cash value as an emergency fund towards the end of one’s life, akin to home equity, according to McClanahan.

How to Calculate the Amount and Term of Life Insurance

When selecting how much life insurance to purchase, prospective purchasers should consider the “three Ls”: liability, loved ones, and legacy, according to Cheng, CEO of Blue Ocean Global Wealth.

For example, how much money would you want to leave for liabilities such as a mortgage, college debts, or vehicle loans if you died? How much money would love ones, such as a husband and children, require if a policyholder’s income was suddenly lost? How much would you like to leave as a legacy for causes close to your heart?

Thinking about these questions, according to Cheng, will help shape the term of a policy.

Cheng provided an example from her own life. When all three of her children were under the age of 18, she acquired a 20-year term insurance with a $750,000 death benefit. Her spouse also works and earns a steady salary. If Cheng had died prematurely, each kid would have gotten $250,000 to help pay for their schooling. She also purchased $250,000 in permanent insurance for Cheng’s spouse to assist pay off their mortgage.

According to advisers, combining term and permanent insurance policies can assist make an insurance purchase more cost-effective than purchasing only permanent insurance.

Advisors recommend that anyone purchasing term insurance use “convertible” term insurance. This allows policyholders to change their term insurance into permanent coverage when the term expires, without having to go through another round of medical underwriting. If the individual is in bad health at that moment, coverage may be rejected.