One of the first steps in shopping for life insurance, along with deciding what amount you need and how long you need it for, is figuring out whether a term policy or a permanent policy will best suit your family's needs. A keen understanding of the differences between them is crucial as you examine different policy options.
Types
Term and permanent life insurance come in several varieties. Level term policies vary in how and whether the premiums and payout amounts change over time. Permanent policies differ on the same points and on how the cash-value component is structured. As just one example, in "variable life" insurance, your cash value and your death benefit fluctuate depending on how your cash value, which is invested, is performing, according to Insure.com. If your investment does poorly and reaches zero, your entire policy could terminate.
Advantages
Term policies have the advantage of being simple--there is no cash or investment component to consider--and having relatively inexpensive premiums compared with permanent policies, according to SmartMoney magazine. Permanent policies, though, do not end after a particular length of time, provided you keep paying the premiums, and they build value that can be borrowed against or, if you no longer want the policy, cashed out, according to New York Life. Also, over the long term, a permanent policy can actually be cheaper then a term policy, according to New York Life, because most such policies qualify for dividends that can be applied toward the premiums.
Disadvantages
Term policies are like rental houses in a sense, according to New York Life, in that they serve their purpose while you keep paying, but they do not allow you to build equity. In that respect, according to the company, "You do have to 'die to win.'" According to SmartMoney, though, the cash value component of a permanent policy is rarely a good deal. They tend to have "up-front (but hidden) commissions that are typically 100 percent of your first year's premium," according to the magazine, which continues: "Worse, it's often impossible to tell what the return on the investment will be, and how much of what you pay in goes toward the insurance and how much toward the investment."
Considerations
According to SmartMoney, the most suitable type of life insurance for nearly everyone is term. But permanent policies do have their place. If you have accumulated a large amount of wealth, you may do well to consider a permanent policy to pay your estate taxes upon your death, SmartMoney suggests. Additionally, if you are buying insurance later in life, such as in your 60s, you may find that companies will not sell you a term life policy, leaving a permanent policy as your only option.
Expert Insight
Personal finance guru Dave Ramsey feels strongly about permanent life insurance. He is against them. "Do not invest money in life insurance; the returns are horrible," Ramsey states on his Web site. "Your insurance person will show you wonderful projections, but none of these policies perform as projected." Worse still, once you die, in a typical whole-life policy, your family does not receive the cash value. Your beneficiaries only get the policy's face value.
Member Comments