Life Insurance: Term vs. Perm (permanent)
Is permanent life insurance a rip off? Should you buy term and invest the difference? Is term cheap, inadvisable and tantamount to "renting?" Is your "life insurance" company being straight with you? Is your agent trying to get paid too much? Here's the scoop on life insurance, specifically- "Perm vs. Term."
Primarily, you should know and understand that there is no one size fits all. Money Decoder, believes that purchasing any product in most any industry is a matter of "fitting" the right product to the right "need"- not the right "person" ...but the right NEED. Whether food, clothing, shelter, or financial products most of them (NOT all) are useful, valuable and appropriate based on how they relate to a specific situation and person's individual and family needs. Money Decoder is built to "yellow-light" your situation so that you can catch yourself if you are spending or not spending in a way that is not beneficial to you. This is true in our life insurance module. Spending in all categories, from Real Estate, to insurance, investments, etc. are ALL a matter of matching appropriate products to appropriate needs - ...we are talking about the needs of the consumer (YOU) not the needs of the salesman (THEM). However, for more exacting assistance on the age-old question of Perm vs. Term, here are some more specific thoughts on how to determine whether permanent or term insurance is correct for you.
To start, we have listed below the primary definitions, advantages and disadvantages to both.
Term – Term Insurance is defined by its name. It provides for a specific “term” during which your policy and the cost of its premiums are guaranteed; usually, 5, 10, 20, or 30 years. After that time, these policies tend to expire as a result of high costs typically associateed with age or an insured’s inability to “requalify medically” for a new policy. As a general rule, we all tend to become less healthy as we get into our older ages. Here are some reasons to consider Term Insurance: 1) Need and want full coverage, but can’t afford permanent/cash value insurance, 2) Financial need is only for a short “term,” (i.e.- "til the kids get past college" or "until retirement" or "until the house is paid off") 3) Don’t need additional tax advantages 4) Retirement plan sufficiently accommodates for future “self-insurance” 5) Not worried about estate taxes 6) Not worried about insurance needs after a certain age because assets more than cover the need.
Permanent – Premiums invested into permanent life insurance policies retain "cash value" AND come in a variety of different
options, including; variable, universal, whole life, indexed, and fixed. This affords one the ability to earn market rates similar to
what is earned in mutual funds, stocks, bonds, or various asset allocation models offered by the insurance company. It can also
provide diversification to your account holdings based on your investment preferences. In addition, they tend to offer tax
advantages and are “permanent” in nature which means that they do not expire after a certain “TERM.” Here are some reasons to
consider Permanent Life policies: 1) Investment oriented person and like investment options, 2) Want to make sure Insurance
needs are met for life (long term), 3) Want or need additional tax advantages for investments (perhaps 401k or other long-term tax
advantaged savings are maxed-out and want more money to grow without the impact of taxes), 4) May have forseeable future
estate planning/estate taxation needs, 5) Can afford guarantee and full insurance coverage. 6) May have or want to avoid the
potential for increase in insurance rates that could be caused by age or health concerns.
Here are some additional thoughts. Get the "COVERAGE" you need. Don't skimp on coverage so that you will have "better"
insurance. Avoid a "one-size fits all" sales pitch (ie. "permanent is better," or "buy term and invest the difference"). In general,
more highly compensated people with greater assets and greater life insurance needs tend to fit better into and more greatly
appreciate the benefits that permanent, cash-value life insurance policies can offer. Young families who are tighter on income and
disposable cash tend to require coverage amounts that are hard to afford through permanent policies. Also, the "cash" in "cash
value" (permanent) policies work better as "investment vehicles" when the insurance element is as small as possible in relation to the
insurance benefit. This is called "over-funding" and it means that you are putting as much cash as you can into a policy in order to
max-out the tax priveledges of life insurance.
Money Decoder determines for you some basic needs guidelines in the life insurance module. From that point, simply use this article as an outline and seek the type of policy that fits into the benefits that best fit your situation in life. Remember, term is for someone who is on a tighter budget, has a shorter-term need, lower income, and does not need additional tax shelters. Permanent is for someone who can afford a choice and still cover the need, has use for additional tax shelters, may have additional future needs or desires for coverage (i.e. estate planning), or may want the permanent coverage due to family of personal health concerns now.
There is no size fits all, but this article should help you determine what fits best for you.