Why is life insurance so complicated? It should be simple. There are some critical differences when you’re comparing term vs. permanent insurance, so I will give you my thoughts on each.
Term Life Insurance
Term insurance is your least expensive life insurance option. Premiums are based on:
- Health
- Age
- Smoker/Nonsmoker
- Length of policy (term)
- Amount of benefit
There is nothing fancy about it. Term life insurance is just like it sounds. It covers you for a specified term, usually 5-30 years. Think about it like auto insurance. It’s just there to cover you in case something happens. Its main purpose is to replace a lost income or pay off any debts.
The way I like to implement and use the term policies is to layer them. So as you’re saving into your retirement accounts and as you’re getting close to retirement, some of these policies will drop off because the need for life insurance decreases over time.
Permanent/Whole Life Insurance
Permanent life insurance like whole life is going to be your most costly option in terms of premiums. It’s more expensive because it’s more likely to pay out than a term policy, it has an investment feature and it has larger commission payouts. As you continue to pay your premiums, you’ll have it permanently, for the rest of your life.
The difference when you’re comparing term vs. permanent life insurance is that permanent insurance, like whole life, pays a dividend each year and creates a cash value bucket that builds up. So not only do you have the life insurance component, but you have an investment in there where it’s building up a cash bucket for you.
You will get at least a guaranteed rate around 2-4%. The company you purchase from will determine how fast or slow it grows.
Which is Right for You?
My thoughts on term vs. permanent life insurance are that I tend to gravitate toward term insurance.
I think there are better investment options available for retirement than investing into a whole life policy, like:
- 401(k) or 403(b)
- Roth IRAs
- Health Savings Accounts
- Taxable brokerage account
I also think whole life policies are rather expensive, and I’m not just talking about the premiums you’re going to be paying into. Take the cash value for example. In the first few years you pay into your policy, there is usually no cash value for the first few years. So it takes a significant time for you to accumulate enough cash to really break even on those policies.
For more information on life insurance, you can check out my post here.
