Please note I am not a licensed insurance agent. This post is to give general information only.
Life insurance is probably one of the most confusing and complex financial product out there. In the PF blogosphere, it seems like pretty much everyone is touting term insurance as the only way to go while permanent insurance is shamed at every turn.
unfortunately, life insurance is not so black or white, all or nothing
There are a few considerations you need to look at before deciding what type of insurance is best for you, namely for how long you will need life insurance, your health, your family status, your financial situation and estate.
to simplify things, here is a basic comparison table
|Term insurance||Term 100 (permanent)||Whole life (permanent)||Universal life (permanent)|
|Coverage length||specified period||lifetime||lifetime||lifetime|
|Payout||only if the insured dies during the term||guaranteed||guaranteed||guaranteed|
|Premiums||usually increase at renewal||remain the same||remain the same||remain the same|
|Medical questionnaire/exam||depends on the insurer, age and amount required||depends on the insurer, age and amount required||depends on the insurer, age and amount required||depends on the insurer, age and amount required|
|Cash surrender value (if policy is cancelled)||no||usually no||yes||yes|
|Investment component||no||usually no||yes, controlled by the insurer||yes, more flexibility and choice for the insured|
|dividend and interest payment||no||usually no||yes||yes|
|Borrowing component||no||usually no||yes, against cash value; decrease benefit amount if not repaid||yes, against cash value; decrease benefit amount if not repaid|
|Use as collateral||no||usually no||yes||yes|
|Riders or adds-on||usually no||yes, additional benefits can be included||yes, additional benefits can be included||yes, additional benefits can be included|
|Overall cost||cheaper||more expensive||very expensive||very expensive|
|Other notes||very difficult to obtain after 70-75||can be obtained up to 85; premiums cease at 100; coverage remains||can be obtained up to 85||can be obtained up to 85|
The major advantage of term insurance is the cost
This is mostly because the odds are in the favor of the insurer. It is very unlikely the insured will die during the term, particularly if they are young.
the main problem with term insurance is that you have nothing to show for it
You pay premiums for a determined period, but once the period has expired, you are basically back to square one. In determining the type of insurance you want, you have to be honest about how you feel about the above point.
the main principle behind term insurance may not be valid anymore
The basis for term life insurance is that as you age, your savings and assets grow, and that by the time you retire, you will have sufficient funds to cover final expenses such as funeral costs, estate taxes or probate fees.
Unfortunately, a lot of people do not accumulate enough wealth during their working years. We also tend to still be in debt upon retiring.
Last but not least, most of us will live well beyond 70-75 years.
the main benefits of permanent insurance are that payout is guaranteed and coverage is for life
Depending on your personal situation, it can make sense to have permanent insurance. For example, if you die at a ripe age with considerable wealth and your heirs are not your spouse or children, the taxes on your estate will be huge. If you want to leave a legacy, you are going to need money.
that being said, permanent life insurance distorts the definition of insurance
Insurance is a tool to replace lost income/property or to cover for a shortfall. It is not meant to build wealth. The returns on the investment component is usually not that great.
the biggest drawback is definitely the cost
Premiums are 4 to 5 times higher than with term insurance. You definitely need to crunch some numbers to see the total cost of your policy over the course of your life. Depending on where you are at, you might be able to save and invest that amount yourself.
I have been reviewing my affairs recently. Although I am single, it doesn’t mean I don’t need coverage or that I don’t need a will.
Based on my personal situation, I am leaning towards a term 100 insurance. This type of insurance would provide me lifetime coverage without all the fuss associated with the investment and borrowing components. It is also slightly cheaper.