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About Life Insurance

Types: term and permanent insurance

There are two categories of life insurance available, term life insurance, and permanent. Term insurance covers you for a set period of time, or “term”, whereas permanent insurance covers you for life.

It would seem that the permanent insurance is the best choice of the two, but it isn’t necessarily so. For example, permanent life insurance is, on average, ten times more expensive than term insurance.

Term is the most popular choice

Term insurance is simpler than permanent, and much less expensive, so it is generally the best way to go for most people. You would generally pay a relatively low monthly premium for a set time. At the end of that time, you may be able to extend the policy, or roll it into a different one that better suits that stage in your life.

Re-invest your savings to maximize benefit

If you want to really maximize the benefits of term life insurance over permanent, then set aside the difference in premium payment. If you are saving $400 a month by taking on term insurance instead of permanent, put that money into an investment fund. The amount you make will increase the financial security of those you leave behind to a much greater degree than paying for permanent insurance would have.

The key though, is to make sure you invest it. If you spend it on other things, you will still have the term policy, but you won’t have the benefits of the savings.

Even without investing the saved money, though, you will come out ahead in most cases using term insurance for a 20- to 30-year period. By that time, your children should be old enough to care for themselves and the need for a larger pay-out will be reduced.

However permanent might be best

So why would anyone ever take out permanent insurance? In some cases, the need to leave a substantial amount of money behind you does not end when your children reach a certain age. Special needs children, for example, may need care for the whole duration of their lives, and it is unlikely that the parents will outlive them. In those cases, the need for the money will always be there.

Likewise, if you have built up enough wealth that your heirs are likely to pay substantial estate taxes (more than $5.45 million as of 2016), a permanent life insurance policy may be an effective way to reduce their tax burden. Since life insurance death benefits are not subject to income tax, converting some of your wealth into a permanent life insurance policy can ensure that they receive a greater proportion of what you have left behind. In many cases, the life insurance policy pay-out is used to pay the estate tax itself, eliminating the need for your heir to come up with a lump sum of cash on their own.