There may not be just one correct type of life insurance for you, because your life insurance needs are likely to change over the course of your lifetime. First, let's look at the two basic types.
- Term Life – In term-life insurance, your coverage is for a specified term (period of time) and a specified benefit amount, and your premiums are only applied toward the insurance benefits. Most financial experts and planners recommend term life as the best economic option, compared to more expensive permanent life insurance.
- Permanent Life – Permanent life coverage extends for your entire life – in other words, it is as permanent as you are. Permanent life policies have two components – a death benefit to be paid to your beneficiary and an investment component. You pay higher premiums that are split into these two components. The investment component, known as cash-value, is invested by the insurance company for your benefit. You may have investment options and more flexibility with premiums and benefits depending on what type of permanent insurance you purchase (whole life, universal life, or variable life).
Insurance companies and agents usually recommend permanent life policies – which is not surprising, since they typically benefit insurance companies and agents. Permanent life insurance may still best for you, but keep in mind where the advice is coming from.
Which type is right for you? Consider these factors:
- Length of Policy – If you plan to hold an insurance policy for over twenty years, permanent life makes more sense, as you will have passed a crossover point between the higher payments you make and the benefits you receive. As your expected policyholder time gets shorter, term insurance makes more sense.
- Age and Responsibilities – As a young single person with new responsibilities, you may have better uses for your money than life insurance – but for most people starting out with a new career and family, term life is a reasonably inexpensive option. If instead you opt for permanent insurance at this point in life, pay close attention to it. Monitor its cash-value and don't let it lapse through missed payments. You will only benefit if you are in it for the long haul.
As you approach middle age and your children get older, you have a decision to make as to whether to continue with term life policies or switch over to a permanent life policy. The longer you wait, the less likely it becomes that a permanent life policy will be worth the extra premiums. Assess your future obligations– college tuitions, home purchases, etc. and decide whether your money is better placed in a cash-value portion of a permanent policy or applied to other expenses or investments.
As you approach retirement, replacing a term-life policy may be difficult or impossible because your risk factors have increased. However, if you have planned properly and have significant investments and retirement income, you probably do not need life insurance in retirement at all – unless you have started a second family late in life or have other beneficiary responsibilities.
- Investing Time and Acumen – If you have the time and at least moderate investing skills – or a savvy investment advisor – you can probably generate a better investment return than you will get from the cash-value portion of a permanent life insurance policy. If you tend to be reckless with investments, a permanent policy is a reasonably secure way to go (although if you are that bad with your own investments, seek an independent opinion before buying a permanent life policy to help you understand exactly what you are buying).
For most people, term life insurance is preferred because of the lower expense, but there are situations where permanent life makes more sense – for example, if you are a conservative investor who has trouble saving, and you plan to keep the policy for a long time.
Check the fine print on any policy and make sure you understand all of the terms before buying, and you should be able to make the best decision for you and your family — but whatever you do, don't leave those who are depending on you without sufficient security.