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Selecting the wrong type of life insurance can cause more damage to your financial plans than just about any other financial plan today. So, the first and most important decision you must make when buying life insurance is: term, permanent or a combination of both.
Term life policies offer death benefits only, so if you die your estate gets the whole pie. If you live past the length of the policy, you or your estate, get nothing 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.
As you do your insurance homework, you quickly find out that 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. You should always concern with 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. Life insurance policies often allow the option of having the proceeds paid to the beneficiary either in a lump sum cash payment or an annuity.
Issued by insurance companies and regulated as insurance and require the same kinds of actuarial and investment management expertise that life insurance requires. Annuities and pensions that pay a benefit for life are sometimes regarded as insurance against the possibility that a retiree will outlive his or her financial resources. In that sense, they are the complement of life insurance and, from an underwriting perspective, are the mirror image of life insurance.
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 normally tax-free to your beneficiary.)
Touted is the saying, "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, 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. 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. Assuming that you keep the policy in force, as 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. Make certain that your budget will be able to honor the commitment for the entire coverage period, you walk away and you are out everything you put in.
Once you figure out your needs, it's time to choose the type of policy that makes most sense for you. more.....
