What Is The Best Policy For Me?

The answer is quite simply, "the one that is in force on the day you die." This is why it is vitally important to select the right policy to meet your needs both today and into the future. Just remember, if you don't die before a certain age, you will die after a certain age! Life insurance is unique because unlike casualty insurance (homeowner's, auto, etc...), the event that triggers the claim payment is 100% certain to happen, it is only common sense and basic financial planning to make sure a policy is in force at the time of the claim.

The answer depends on several factors such as your age, your stage in life, and your budget. There is no substitute for being young and in good health as life insurance premiums increase at an increasing rate with age and many people cannot afford or cannot qualify for life insurance if they wait too long or develop health conditions. Basically, there are two types of life insurance: term and permanent. Here is a brief description of each:

When is Term Life Insurance the Right Choice?

Term Insurance provides the largest amount of insurance protection for the lowest initial cost although because term policy premiums increase substantially once the initial premium guarantee period expires (typically from 10 to 30 years), maintaining a term policy will become cost-prohibitive in long-run. The lowest overall cost for a term policy can be achieved by selecting the longest premium guarantee period your needs and budget will allow. While cost is always a major consideration, a good quality term policy will have a conversion privilege which allows you to exchange the term policy for a permanent policy without having to meet current underwriting requirements.

Term life insurance is most appropriate when you have a temporary need for life insurance protection - or need extra coverage for a specified period of time - such as through a child's college years. No matter what your circumstances, if you can't afford permanent insurance, term insurance (or possibly a combination of both term and permanent) is your best buy.

One caveat: Term insurance premiums increase exponentially (they increase at an increasing rate) at older ages. For example, the difference in premiums between ages 30 and 40 is not nearly as drastic as from ages 40 to 50. Also, premiums will increase drastically at the end of the premium guaranteed period (typically from 10 to 30 years) so, the lowest long-term cost will be achieved by selecting a term policy with the longest premium guarantee period your budget will allow and even lower overall premium cost can often be realized by utilizing a permanent policy even if you decide to surrender the policy at some point in the future.

Term insurance is a good first time life insurance product if you aren't sure what your future will be. Some term policies offer a conversion option that allows you to buy permanent insurance in the future regardless of your future health. This option lasts for a predetermined period of time and typically requires no medical exam to qualify. If you are going to need life insurance for the long term, permanent insurance is by far your best buy.

When is Permanent Life Insurance the Right Choice?

If you knew the date of your death, it would be easy to buy just the right length of coverage. There is, however, a very real risk of "outliving" a term policy. This is where a permanent policy is vastly superior since this type of policy is the only practical way to provide affordable life insurance protection that you can never outlive. Also, permanent policies often contain cash value (equity) that can be utilized during your lifetime.

Permanent policies typically allow for flexible premium payments thereby allowing the policy owner maximum control and the ability to modify the policy, as future needs change. Some policyholders may want their permanent policy to function as "lifetime term insurance." While other policyholders will want to pay a higher premium in order to take advantage of the cash value accumulation, which they might wish to access during their lifetime or use to supplement their retirement, or they might want to pay premiums for only a limited number of years and then have the policy pay for itself. These are but a few examples of the tremendous flexibility provided by a well-designed permanent life insurance policy.

What is "Return-of-Premium" Life Insurance?

An increasingly popular variation of term life insurance is a "Return-of-Premium" policy that refunds 100% of the premiums paid at the end of the premium guarantee period, or you can select a reduced paid-up policy with no additional premiums payable for the rest of your life.

Permanent insurance is designed to remain in force for as long as you live. Think about the fact that your need for life insurance protection may be more "permanent" than you think and may extend well beyond your working years and be needed to provide benefits in addition to just income replacement. This is especially true in estate planning situations or facilitating a business transfer, meeting estate tax liabilities, or providing educational funding or charitable gifting.

Term vs Permanent: Which One Should I Choose?

Life insurance premiums increase at an increasing rate as you age, so once you pass a certain age, the cost of term life insurance becomes prohibitive. Also, if you develop a health condition you may be uninsurable at any price. Most permanent policies are flexible and can be structured to meet both your short and long-term needs. Because a permanent policy is designed to provide lifetime coverage, you don't need to worry about becoming uninsurable or meeting underwriting requirements in the future.

Why Not "Buy Term and Invest the Difference" in the Premium Costs?

Under this scenario, an amount of money representing the difference between the permanent life insurance premium and the traditional term life insurance premium is invested in a mutual fund, annuity, or other investment vehicle. The idea is that the investment fund will replace or exceed the cash value policy equity accumulation of permanent life insurance. For most people, this is a faulty strategy:

  • Most people do not have the discipline to consistently invest the "difference." This is especially true because any chance for success depends on investing consistently in the early years when the difference between the permanent and term policy premiums are the greatest. Remember, term insurance premiums will increase rapidly and dramatically in later years / ages.

  • If you need to renew or reapply for term life insurance the cost may become prohibitive or completely unavailable as you get older - especially if you develop health problems.

  • The selected investment vehicle may not consistently perform as planned (or hoped for.)

  • Permanent life insurance offers unique income tax advantages pertaining to both the cash value accumulation and death benefit that are unmatched by other wealth-accumulation options.

Today, many people mistakenly believe that term insurance is always the best value. This is true only to the extent that the premium remains affordable so that the policy is in force at the date of the insured's death. Unfortunately, the public, as well as many agents have not recognized the fact that the old "buy term and invest the difference" philosophy is outdated and simply unwise in light of the lifetime guaranteed permanent policies currently available.