Is permanent life insurance for you?

This post comes from Rob Berger at partner blog The Dough Roller.

My wife and I both have life insurance. We have 20-year term policies, first purchased when we adopted our children 17 years ago. As hard as it is for me to believe, our policies are just a few short years away from lapsing. And that's caused me to ask whether we would have been better off purchasing permanent life insurance.

Permanent life insurance, as the name suggests, is a form of life insurance that lasts for the life of the insured. It's distinct from the more typical term life insurance in two very important ways. First, term policies last for a fixed term, typically ranging from one to 30 years. As I mentioned, my wife and I have 20-year term policies.

Second, term policies are bare-bones life insurance policies. You pay a premium during the term. If the insured dies while the policy is in force, the beneficiaries receive the death benefit. If the policy expires while the insured is alive, there is no cash value.

In contrast, permanent life insurance has an investment component above and beyond the insurance. Since a permanent life insurance policy lasts for the insured person's entire life, a payout is guaranteed. Your permanent life insurance premiums are invested, so the policy accrues cash value. (Post continues below.)

While permanent life insurance may sound like a great deal, it comes with a hefty price tag. Buy a permanent policy today and you're guaranteed to pay a much higher premium than you would for a term policy. While the actual premium depends on a number of factors, premiums for permanent (sometimes called whole life or universal life) policies can be five to 10 times higher than term life insurance.

Those extra dollars paid in the early years of a permanent policy get invested and grow. That growth is tax-deferred if the policy is cashed in during the insured person's lifetime. Proceeds are usually tax-free to the beneficiary upon the insured person's death.

Is permanent life insurance a good option?

For most people, most of the time, permanent life insurance is a bad choice for at least three reasons:

• Most don't need it. Most people need life insurance when somebody depends on them for support. This is typically the case when parents are raising children. But fast-forward to the couple's golden years, and the children should be self-sufficient. With retirement savings and Social Security, neither spouse should be depending on the other for financial support.
• You don't control the investments. As promising as permanent life may seem, you have very little control over the investment choices. For this reason, it's typically better to buy a term policy and invest the difference on your own.
• Expenses are high. Most insurance companies take a significant portion of the premium in the form of expenses. It's only what's left that actually gets invested. These expenses can be steep, rising to 3% or more. This is another reason why investing on your own is generally the better choice.

So, when is permanent life insurance a good choice? In some cases you need insurance for your entire life. One example would be if you care for handicapped children. A good friend of ours has two grown children who will need care for the rest of their lives. Because they will never be self-sufficient, a permanent life insurance policy may be a good choice.

There are also tax considerations. Because the proceeds of a permanent policy are often distributed free of taxes, such a policy can be part of wise estate planning. But a tax or estate lawyer should be consulted before making any decisions.

Should a permanent policy be right for you, there a few types to consider:

• Traditional whole life policies are the simplest and offer the most guarantees. The premium is guaranteed, as are certain death benefits and cash values.
• Universal life policies have varying premiums (with a guaranteed maximum) and minimum guaranteed cash values and death benefits. Instead of the dividends paid to traditional whole life policyholders, universal policies accrue interest at a credited rate determined each year.
• Variable life policies offer the fewest guarantees and the highest possibility for increasing in cash value.

Finally, if you are considering a form of permanent life insurance, speak to an insurance expert who is not trying to sell you insurance. An insurance broker would love to sell you a permanent policy because he or she stands to make a substantial commission. That's not to suggest that life insurance brokers aren't honest, but you'd be better served speaking with an expert who has no self-interest to bias his or her opinion.

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In the end, do your homework, shop around online for life insurance, and make an informed decision. For us, I'm confident we made the right choice with term insurance.

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