There are numerous aspects of personal finance that many people feel are akin to a root canal, and life insurance is just about always at the top of the “no fun” list. Nonetheless, understanding which type of coverage might be best for you just could be the key to making your life insurance decision a lot less painful...
There are primarily two types of life insurance – Term and Permanent. The basic difference between them is that term policies cover the insured for a set time period, and permanent life insurance lasts for as long as the premiums are paid. Permanent life policies are also much more expensive, and unlike term are not a buy-it and forget-it product.
Permanent policies demand regular reviews, and even then, policy analysis can be tricky. An all too common problem are policies that cost 10′s or even 100′s of thousands more than they were ever expected to.
The two keys to avoiding the most common pitfalls with permanent life insurance are: First, have an experienced expert who's not being paid by commission thoroughly review the policy before purchase. Second, do not buy permanent life insurance as an investment.
For the vast majority of people and situations term life insurance is usually the better option. But, with that said, there are occasions when permanent life insurance, structured correctly, may be an option to consider.
The Two Occasions to Consider Permanent Coverage:
1. For high net worth individuals with an estate near or likely to exceed State and / or Federal tax limits, life insurance owned within an irrevocable trust could provide liquidity to offset taxes and the risk of a forced disposition of illiquid estate assets.
2. Another occasion to consider permanent coverage is when you have a pension through an employer that offers reduced pension payments in order to protect your spouse in the event of your death. For healthy individuals privately insuring the spousal benefit might be a less expensive option, and could also add flexibility.
These are the two occasions when permanent life insurance may be worthy of consideration. But, for most people, Term Life is usually the better vehicle to meet their needs.
Why Term?
It's primarily due to the fact that most people, especially those under 65, likely don't need an expensive lifelong death benefit. Instead, they're usually much better served with the far larger and less expensive death benefit that term coverage offers.
The other consideration is related to investment return. A well-structured permanent life policy will cost about 10 times that of a term policy. That's due to an investment component within permanent coverage that's ideally designed to accumulate cash value over the life of the policy.
The extra expense may be worthwhile if your intent is to assure a lifelong death benefit. However, the problem is that many people buy permanent policies for not just the death benefit, but also as an investment for income in retirement.
If the investment component within the policies performed as well or better than other traditional investments then it wouldn't be a problem, but unfortunately, after calculating the net return (after all expenses) many permanent life policies have not historically fared well.
Some argue that if you hold permanent insurance for more than 20 or 25 years the returns can be attractive as a conservative holding. The problem with that argument is they are often just looking at a long holding period. What's usually missing is how the return declines once you begin to access the policy for income. What's also missing is the logic of locking-up "conservative" investment assets for 25 plus years in a product that has a substantial history of controversy and complaints.
The bottom line for consumers is that permanent life insurance may be a consideration when a lifelong death benefit is needed, but should not be purchased as an investment or retirement income vehicle.
