life insurance

Term vs. Permanent Life Insurance: Does the Battle Really Continue?

There seems to be two fundamental, opposing viewpoints in the financial community over which type of life insurance, individuals in this society should purchase. Many financial advisors believe both permanent and term insurance, should be considered and play an important role in the financial planning process. However for the sake of argument, we will discuss the different schools of thought, financial advisors who swear by term insurance only, and their opposition, the permanent insurance folks. Okay you are probably bored with this topic by now but one more article cannot hurt.

Term Insurance is the heralded vehicle seen on commercials in the United States. We have all been exposed to ads like "you can buy a $100,000 Life Insurance for $8 a month at age 27." Sounds great, where do I sign up for this policy? Before anyone wants to throw a lawsuit at me, most of these commercials are in compliance. The problem is not the ads but how we have been conditioned about life insurance, especially term." Term insurance" has become a" best quote party" instead of a discussion of what the policy can do for me. I have talked to individuals about their term policies and they have no clue about their insurance, other than the face amount and the length of the policy.

Permanent insurance has many forms, however we will use whole life insurance to illustrate the point. (Disclaimer: Universal and Variable Universal Life Insurance both have elements of a term and permanent policy.) The idea behind permanent insurance is to have coverage your entire life. When you die, the policy will be paid to your beneficiary, unless the policy is challenged by the insurance company over possible fraud or something. Many in the public argue over the necessary need for a permanent life coverage.

Term insurance lasts only a specific amount of time unless it is a one year adjustable policy (some of these end at age 65). A one year adjustable term policy's premium is fixed for 12 months, and the company reserves the right to raise your premium every year on the anniversary and usually will. Otherwise you will have an option of possibly 5, 10, 15, 20, 25, or 30 year term. Some polices are able to be converted to a permanent insurance plan, often without evidence of insurability (maybe no physical) within a certain amount of years after the policy has been issued. Why is this important to know you ask? Term is good for covering large debts when limited dollars are available. For instance you buy a $150,000 home and have $100,000 worth of student loans debt and you make $40,000 a year income, and have a non-working spouse and child, you may need $1,000,000 worth of coverage and term is all you can afford.

Let us say you purchase a $500,000, 10 year, level term insurance policy with no ability to convert the policy after five years, and you have an heart attack in the 9th year of the policy. You still need the $500,000 policy after the 10th year, but you know that probably be declined or heavily rated for a new policy . What can you do in this situation? You could keep your current policy, maybe the policy goes from $100 a month to $1900 (or maybe they will let you drop the face amount to 100,000 and you pay $1000 a month). Also if that price is to steep, you could possibly buy a guaranteed policy for an amount of $50,000 or less, but you have to live a certain amount of years to receive the full death benefit and often pay a hefty premium. Ladies and gentleman this can be a reality or have foresight to purchase a policy with the ability to be converted. If you purchase term insurance, please find out if it can be converted and how many years you have this privilege.

Permanent or whole life insurance can be cost prohibitive to many individuals. People do not want to pay $250 a month for a $250,000 policy. This is not the family car they are talking about, but life insurance. Life insurance only pays off one time, so why spend so much on it if I can get double the coverage with term and pay $50 a month; why even have this discussion? With many universal life and all whole life insurance policies, you can lock your rates, and once the policy is approved, who cares if you are diagnosed with inoperable cancer in 27 years. Also if you need a loan or something, there may be cash value in the policy for an emergency. This does not exist in the usual term insurance policy. When you get to the end of a term life insurance policy, it is usually a good reason to buy a new policy or a reason to yell at your financial advisor. Key point, whole life insurance should not be a replacement for saving for retirement.

Now, now, term insurance definitely has its advantages. You can usually cover a large amount of financial responsibilities with less money. Term insurance is often an excellent vehicle for short- term obligations such as when the kids go away to college, and you do not have the money to otherwise send them if you die. Also if cannot afford permanent coverage, term should be considered.

My gripe is how term insurance is being sold as the only policy needed by mankind. Remember if you believe in the "buy term and invest the difference theory" you need to save money and have a return on your investments equal to or greater than the current death benefit of a permanent plan to make up the difference when your 30 year term policy expires.

Permanent and term insurance both have their positive and negative attributes. Do not rule either one out until you carefully evaluate your own financial situation. Term insurance is usually a cheaper plan in youth but becomes more expensive as you get older. Many individuals are turned off by the cost of a permanent or whole life insurance plan in their 30's as well as their late 60's. See your financial advisor for more information or request a quote for life insurance.