Term or Permanent Life Insurance

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Life insurance is a complicated subject that doesn’t make for fun, lively reading. But if you can stick it out and read this, you might just come out with an idea of what kind of life insurance you should buy: term or permanent.

Let’s make sure we’re on the same page with our definitions of term and perm life insurance.

Term life: Term policies cover you for the duration of the term period – one year, thirty years, until you turn 65, etc. It pays a death benefit when you buy the farm, so to speak.

Permanent/cash value: Permanent polices are often referred to as “cash value” polices because they usually include a death benefit and some type of long-term, tax-advantaged savings plan.

So term life policies pay a death benefit. (Side note: how much of an oxymoron is “death benefit”?) That’s it. It’s simple, and that’s one of the attractive things about term policies.

Cash value plans pay a death benefit, too, but they also have a savings component. So if, and this is the Big If, you hang on to your cash value life insurance policy long enough, the amount you earn with the savings account will balance or perhaps exceed the amount you pay in premiums.

The thing to keep in mind, though, is that cash value policies are more expensive. So cash value/permanent policies are probably not a worthwhile short-term investment, because it will take some time before the savings part accrues enough cash to counter the more expensive premium.

For you scanners out there, here’s the lesson you might take from what we’ve covered so far:

  • If you’re going to hold on to your insurance forever—or at least longer than 15-20 years—then cash value/permanent might be a good pick.
     
  • If you’re not going to hold on to your life insurance for that long, term life insurance probably a better option than cash value/permanent life insurance.

Term life advocates, particularly finance experts outside of the insurance industry, invariably say “buy term and invest the difference.” The “difference” refers to the amount extra you would have to pay for a cash value/permanent life policy. That extra amount, they say, can put to use elsewhere, such as into a Roth IRA or 401k, where it will offer a better rate of return than in a cash value savings account.

If you follow their advice and decide on a term policy, make sure you always look for renewable and convertible term life policies! Renewable policies allow you to renew your policy without a medical exam. Convertible policies come with the option of changing to a permanent policy, without a medical exam.

And as always, whenever shopping for an insurance policy, research your options, shop around, and buy from someone you trust.

Insurance Resources

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