If you want to throw your hard-earned money into a hole, then buy permanent life insurance.
While life insurance is a key component of your financial planning, it shouldn’t be an expensive investment vehicle. Your policy should cover enough to replace the lost income if you die, or your spouse dies, so that the remaining person has enough to live on. So for most people, term life insurance will do the trick, and permanent life insurance is just an unnecessary expense.
What is term life insurance?
Term insurance, the most common policy, is cheap, simple and reliable. A policyholder purchases insurance and pays premiums for a set period, typically 10 to 20 years. If the policyholder dies within that period of time, a death benefit is paid to the policy’s beneficiary. When the policy ends, it can usually be renewed for another term. Term insurance is easy to establish, generally inexpensive and a great way to provide for your loved ones in case something unforeseen occurs.
Your needs may change when your children are grown and married with families of their own. As you get older, term insurance allows you to reassess your insurance needs to make sure you’re still getting the best coverage for where you are at that moment.
What is permanent life insurance?
Permanent insurance covers you for life, paying out a death benefit whenever you die, and combines it with a savings component. With permanent insurance, you are effectively engaging an insurance company to manage a money market fund for you. Agents like to tout the investment opportunities and tax benefits of permanent insurance policies, but if the stock market doesn’t perform well, you may end up owing money to keep the policy active.
But the premiums and fees are much more expensive, and there are other ways to invest your money that offer tax benefits. Get term life insurance, which is far less expensive, and invest the difference in a mutual fund. If you have a chunk of change that you want to use responsibly, open a Roth IRA and invest in a total market fund. If you throw money in it every year, you are almost guaranteed to grow a tidy sum for retirement, whether its your own, or for your family.
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While no investment advisor will ever recommend whole (permanent) life insurance, I was fortunate to be contactwd by an insurance advisor soon after I graduated from business school and had started working. I,too, did not see any advantages to buying permanent insurance, but he convinced me to buy a small policy of $ 10,000. Yes, term life insurance premiums are less, but they do rise periodically — usually every 5 years — and at some point the insurance lapses and cannot be renewed. That point is usually late in your life when you need the coverage the most. Yes, you will be further ahead financially if you invest the difference between term and permanent life insurance premiums, but nobody ever does that.
I have used the loan value of my permanent life insurance policies as an emergency fund. i have purchased several properties using the funds from these loans as down payments. I now own 7 properties and have a net worth exceeding several million dollars. I could never have built my fortune without my permanent life insurance policies. I owe that insurance advisor much more than the fees he earned on those sales. He gave me great advice and I am forever indebted to him.
I purchased whole life insurance policies for each of my sons when they were born. For around $10 each per month for $25K policies, we had the security of knowing that if something happened to either one of them, funeral arrangements would be covered. As my sons grew up, my husband pressured me to cash in the policies; I would not. They are now both in college, and each one has a cash-out value of over $1K. One of my sons was diagnosed with Type 1 Diabetes in 5th grade; this may be the only life insurance he will be able to purchase. The payments are in our monthly insurance bill; it is hardly noticable. These policies gave me piece of mind, and I’m glad we did it.
In most instances, term life is the way to go. For parents with special needs children and families concerned with estate taxes, permanent life insurance definitely has a place in their financial planning.
I hear this and I disagree. This only apples to young people. Had I not purchased life ins a plan for term would NOT be affordable and after a certain age they will jot let you renew for a long term. I respect Ilyce very much most of the financial people don’t tell you this. We checked on term before we purchased our ins and we could not afford term nor get it for too many years, then if your health goes bad you have no ins.
This article completely ignores, as do most traditional financial planners, the living benefits of permanent life insurance. If you look at death benefit ALONE the article is spot one, but start taking into account the living benefits and I have to respectfully disagree with the author.