March 20, 2014 3:35 pm EST

Which Is Right For You: Permanent Or Term Life Insurance?

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

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.

February 8, 2014 5:46 pm EST

The Differences Between Whole Life Insurance And Term Life Insurance

Deciding whether to purchase whole life or term life insurance is a personal decision that should be based on the financial needs of your beneficiaries as well as your financial goals. Life insurance can be a very flexible and powerful financial vehicle that can meet multiple financial objectives, from providing financial security to building financial assets and leaving a legacy.

Here are some of the main features of term and whole life insurance.

  • Features of term life insurance:
    • Provides death benefits only
    • Pays benefits only if you die while the term of the policy is in effect
    • Easiest and most affordable life insurance to buy
    • Purchased for a specific time period, such as 5, 10, 15, or 30 years, known as a “term”
    • Becomes more expensive as you age, especially after age 50
    • The term must be renewed if you want coverage to be extended beyond the term length
    • Can be used as temporary additional coverage with a permanent life insurance policy
    • Can be converted to whole life insurance
  • Features of whole life insurance:
    • Covers you for life
    • Provides death benefits as well as a cash value accumulation that builds during the life of the policy
    • You typically must qualify with a health examination
    • Can be purchased without a medical exam, but at a higher cost
    • Takes 12 to 15 years to build up a decent cash value
    • Can be a good choice for estate planning
    • Cash value is based on how much the return on investment is worth
    • A portion of the cash value can be withdrawn or borrowed during the life of the policy
    • Initially has more expensive premiums than term life insurance, but can potentially save you money over the life of the policy if in force for a considerable number of years
January 13, 2014 7:45 pm EST

The Meat and Potatoes of Term Life Insurance

Insurance can get confusing. This is an important reason it pays to have a knowledgeable person make you understand it before you purchase it. In simple terms, imagine buying a video game system from a salesman, and then he sells you video games for a different system. Both purchases are useless because what you bought isn’t compatible. If you had the right person explain it to you, you’d know that what you were buying before you bought it. Today’s explanation is Term Life Insurance.

WHAT IS IT?

A term life policy covers you for a specific period of time (such as 10, 20 or 30 years). If you die during the term period, the person you named when you bought your policy is paid the coverage amount. If you don’t die during the specified term period, your coverage simply ends. Term life generally does not build cash value nor does it include any features related to cash value.

WHY IS IT GOOD FOR ME?

When considering life insurance, term life insurance is a good first choice – especially for families just starting out. Term life insurance is an easy, affordable way to provide financial peace of mind for you and your family. It helps fill the gap left by the loss of your income and protects your assets.

Term life can also cover specific financial obligations that will disappear over time, such as a mortgage, wedding expenses, college tuition or loans. In short, term life insurance provides an excellent answer to the question: How will your family manage financially if you die prematurely?

Because term life insurance is temporary and does not typically build cash value, coverage is generally less expensive than permanent coverage. There’s no commitment, either. If you decide to end your coverage before the term is up, you can simply stop making payments and that’s it – there’s nothing more to pay or any other obligations.

November 24, 2013 4:04 pm EST

The Benefits of Whole Life Insurance

Life insurance is a big choice for any person to make. It doesn’t just involve them, it involves their entire family being in on the process of getting whole life insurance. There are a bunch of different types of life insurance policies, but whole life is a great choice as a policy to go for.

Term life policies with protect you for a certain amount of time. If you get a 20 year policy, this policy ends at the 20 year mark, a whole life policy will cover you for the duration of your life. A whole life policy also has a cash value. This means that some of the money you pay into the policy every month is saved or invested, so you can be able to take money out of the policy or borrow against it.

What are some benefits to having a whole life insurance policy?

You beneficiaries are covered for the duration of your life. This makes people more comfortable than with the time limit placed on a term policy.

If you or your beneficiaries don’t file a claim, the money you pay into the policy every month isn’t a waste of money, but has a cash value for which you can draw on.

If you happen to be a high-income person who maxed out your tax deferred investments, a variable or variable universal policy serves you as an additional savings or investment tool.

Making a decision on what life insurance to choose is a difficult, but it doesn’t have to be too difficult. The important thing is choosing a policy that best looks out for you and your family.