3/16/2011 1:45 PM ET|
Term or permanent life insurance?
How do you know if you have the right coverage? Here's a quick look at all of the options: term, whole, variable and universal.
Few people who have bought insurance -- or even window-shopped for quotes -- have escaped the debate over term versus permanent insurance.
And the wrong kind of life insurance can do more damage to your financial plans than just about any other financial product today. So, the first and most important decision you must make when buying life insurance is: term, permanent or a combination of both? Let's look at each.
Term life policies offer death benefits only, so if you die, you win (so to speak). If you live past the length of the policy, you (or, more specifically, your family members) get no money back.
Permanent life policies offer death benefits and a "savings account" (also called "cash value") so that if you live, you get back at least some of, and often much more than, the amount you spent on your premium. You get this money back either by cashing in the policy or by borrowing against it.
Permanent life insurance is more expensive
As you might expect, permanent life insurance premiums are more expensive than term premiums because some of the money is put into a savings program. The longer the policy has been in force, the higher the cash value, because more money has been paid in and the cash value has earned interest, dividends or both.
The debate is all about that cash value. If you buy a policy today, your first annual premium is likely to be much higher for a permanent life policy than for term.
However, the premiums for permanent life stay the same over the years, while the premiums for term life increase. That extra premium paid in the early years of the permanent policy gets invested and grows, minus the amount your agent takes as a sales commission. The gain is tax-deferred if the policy is cashed in during your life. (If you die, the proceeds are usually tax-free to your beneficiary.)
The saying you always hear is, "Buy term and invest the difference." The fact is, it depends on how long you keep your policy. If you keep the permanent life policy long enough (and the market ever fully rebounds), that's the best deal. But "long enough" varies, depending on your age, health, insurance company, the types of policies chosen, interest and dividend rates, and more. The reality is that there is not a simple answer, because life insurance is not a simple product.
Guidelines to live by when buying
Even with all of these variables, there are some guidelines you can follow. The key is how long you plan to keep the policy. If the answer is less than 10 years, term is clearly the solution.
If it is more than 20 years, permanent life is probably the way to go. The big gray area is in between. Here is where you need an expert to run the term vs. permanent analysis for you. Of course, this assumes you keep the policy in force. Most people drop their policies within the first 10 years, but if you do your homework now, that shouldn't be the case for you.
How to choose
Start by assessing your needs with MSN Money's life-insurance estimator.
Categorize your insurance needs by their use. If you need $60,000 for college and your youngest child will graduate in three years, you need $60,000 of term insurance as a short-term hedge against your death, thus insuring that your child can finish his or her education. Meanwhile, if your estate will owe $200,000 in taxes at your death, you probably need permanent insurance, because you're not likely to die in the next 20 years (you hope). You also may want to re-evaluate your estate plan, but that's a different issue.
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I've been lucky enough to be in the insurance insurance industry now for 30+ years...
There is a simple answer to this question... Just get what you can afford to get! Forget this silly cash value or term business.. Get the protection 1st. Then sit with an agent for some long term planning... then decide which is the best way to go.. Don't worry, the insurance company you chose to do business with will convert your plan when you want to! They do not want to lose your business!
From a strictly dollar and cents point of view, term is the best value IF ... IF... you will do something constructive with the balance of what the Universal or Whole Life premium would have been...
The only one you will lie to is yourself!
I have clients who will probably retire on $60,000 annual tax free income with life insurance! Will YOU???
Ask any great agent for ALL the details!
Advantages of Term Life Insurance
- Generally lower cost than permanent insurance.
- Offers higher coverage at a more affordable price.
- Gives you the most coverage for the lowest cost - up to 30 years.
- Ideal for younger families when the need for protection is greatest.
Choose Term Life Insurance for covering specific needs that will disappear with time, such as:
- Income replacement
- Financial security for dependents
- College funding
- Final/burial expenses
How cheap is term life insurance? Use the free quote engine at Quality Term Life (www.qualitytermlife) to compare rates from hundreds of top rated companies. (No requirement to provide your contact information before you can see the quotes.)
The longer you own your permanent policy the more cost effective it becomes. Canada Life's dividends on their permanent whole life policy has paid out 5.9% to over 12% since the 1950's. Term is practical for short term liabilities but for anyone wanting to own their life policy for life it's a great idea to convert or get something now so you can lock in the rates.
There's enough blogs on here to attest that cash value/whole life/unifersal life/and whatever name the industry wants to change it to say it's crap. Excuse my language but when hard working people are constantly being ripped off and ill-informed by whole life companies it makes me upset. If anyone is actually concerned about their life, please get term insurance for your family AND get yourself in a position to save for retirement. It's plain and simple; check out Suzie Orman!
*remember it's the decisions you make today that determine your family's future tomorrow!
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