Buying life insurance requires a lot of thought and planning. For most people, the choice is between a permanent life policy and a term life policy. Here’s a bit of information on permanent life insurance to help you make a better-informed decision.
Permanent life explained
Permanent life insurance will remain in effect until the insured dies, after which the death benefits will be paid out to the beneficiaries. The premiums on permanent life are designed to remain equal throughout the life of the insured. Premiums are high because permanent life policies develop cash values that can be accessed by the insured through surrenders or through loans against the policy.
The cash values in permanent life insurance policies typically include two components:
A guaranteed cash value, already referred to above. The cash value grows based on a pre-set schedule, and grows to a sizeable amount upon maturity of the policy (typically at age 100).
Most permanent life insurance policies additionally have a non-guaranteed cash value element, typically made up of dividends or earnings on the cash value, which can enhance the value of the life insurance policy over time.
There are many permanent life policies in the market today with varying features and varying degrees of control over the cash value component of premiums.
Permanent life vs term life
In sharp contrast to all the cash-value possibilities that permanent life can offer, term life insurance policies only offer you the death benefit, and only cover you for a particular number of years, called the ‘term’. Because of the absence of cash values and the temporary nature of this policy, term life premiums are more affordable.
Permanent life insurance can be substantially more expensive than term life insurance, but the death benefit is guaranteed as long as premiums are paid. On the other hand term life policies can buy you the same amount of death benefit as a permanent life insurance policy, at a fraction of the premium cost.
The pros and cons of permanent life insurance
The drawbacks of permanent life insurance are:
With most permanent life insurance policies, you don’t have a say in the investment portfolio to which your cash value component is linked.
Because of its investment component, the best benefits on a permanent life policy are gained in the long term. So this is not a great life insurance policy for someone who wants a stopgap life insurance policy.
If you fall short of funds the cash value portion of permanent life policy can be borrowed against. This attracts interest, so it is advisable not to borrow against a permanent life policy unless it’s a last-resort effort to access money during a tough financial situation.
The investments of most permanent life insurance policies are by nature very conservative (variable permanent life policies are the exception) with a strong possibility that if you were to invest the same amount of money elsewhere, you would earn much more on your investments. In fact there is a school of thought that advocates that permanent life insurance may not be worth the money at all when compared to the benefits of buying term and investing the difference in premiums (between term and permanent).
Let’s move on to the advantages of permanent life.
If you have difficulty exercising discipline in money matters, permanent life is a great option because it offers you ‘forced savings’. If not for the policy, you probably would have difficulty investing money so consistently into an investment avenue.
Permanent life is a life-long insurance policy and the premiums are consistently level. Though it can be quite a pinch in the first few decades of your policy, as the years pass, it can get more affordable.
When you outlive a term life policy, you will need to buy more insurance, predictably at higher premiums. This problem does not arise in permanent life because the policy is lifelong, and premiums are consistently equal.
Is permanent life insurance right for you?
It all boils down to the life insurance needs at your current stage in life. If you are very young and have several financial obligations such as small kids, their college education to think of, mortgages, loans, etc. then permanent life policies may not be right for you just yet because of their high premium costs. Term life would be a lot better. On the other hand, if you are older, and are mostly done with your financial obligations you will need a life insurance policy to cover you for the rest of your life, and that’s where permanent life seems the more feasible choice.
How long do you plan to keep your life insurance policy? If you want to be insured for several decades, you have to think of permanent life and not term, because even though term premiums are low, they will increase each time your policy expires, and you take out a fresh policy.
However, one must also consider the fact that permanent life insurance investments grow conservatively. Therefore, those who are looking at great returns on their investments are better off buying term and investing the difference (that they save on premiums) in tax-deferred investment vehicles like IRAs, Roth IRAs and even educational accounts like the 529s. The general opinion is that if one can make sound investments elsewhere with this savings in premiums, the returns would be much greater returns than a permanent life policy could provide. If you look at it from this angle, permanent life insurance doesn’t really seem worth the money. The choice however, should totally depend on individual considerations.
Finally…
You need to spend some thought on how much your coverage should be. With permanent life especially, you don’t want to be over insured because defaulting on your premiums can cancel your policy. You don’t want to be under insured either, and put your family through tough times. So use an online life insurance needs calculator for an accurate estimate of how much life insurance you will need.
Shop around before you buy your life insurance. You can do this online in a hassle-free manner by getting quotes from a reputed online life insurance agency. Check if the website is BBB-accredited, and you can be assured of its authenticity.
