Term Versus Permanent Life Insurance- What's Right For You?

Summary: Almost everyone needs life insurance. Whether it's to pay off debts, ensure the family income and standard of living, make sure college can be paid for, leave a bequest to charity, provide liquidity for a business or real estate, or hedge against the return of estate taxes. Most of our clients need at least some life insurance. At the same time, two people who are outwardly similar may have very different needs, cash flows, risk tolerances, and so forth. For many people, the ...

Almost everyone needs life insurance. Whether it's to pay off debts, ensure the family income and standard of living, make sure college can be paid for, leave a bequest to charity, provide liquidity for a business or real estate, or hedge against the return of estate taxes. Most of our clients need at least some life insurance. At the same time, two people who are outwardly similar may have very different needs, cash flows, risk tolerances, and so forth. For many people, the biggest decision is not the amount of insurance-it's how to pay for the insurance they need. That brings up the term versus permanent life insurance consideration. In some cases, the need for insurance is temporary-maybe for the next 20 years, until the house is paid for and the kids have left the nest. In other cases, the need may be for a longer term-maybe until a business interest is sold. The need may, also be for a lifetime--to ensure estate taxes can be paid[1] or to provide cash to equalize an estate, and so on. When Should You Consider Choosing Term Life Insurance? Term life insurance is much like a starter home or apartment. It is basic and inexpensive, and that's all some people will ever need. But as with starter homes, there are variations of term life insurance that offer room to grow as needs change. There are also fixed-duration options, where the amount you pay is guaranteed, and other options where the amount adjusts-just like a mortgage. In other ways, term life insurance is like renting-you pay money every month[2], on time, or you lose your insurance (or apartment). Like some rentals, term insurance has a "lease with option to buy" provision. This can be the best of both worlds when you can't afford the permanent insurance (or home) just yet, but know you will be able to buy it in the next few years. If you buy term insurance just to cover a specific time period, such as the years when the children are young, it makes sense to select a plan that will last, at the same premium amount, for that entire period. But, since nothing ever seems to go as planned, we usually recommend that our clients buy "convertible, level premium" when they choose term life insurance. What is convertible, level premium term life insurance? This is a plan that is inexpensive while it is used as a term life insurance policy, and the premiums stay the same for the selected period (anywhere from five to thirty years or longer). The convertible aspect is what makes this option such an attractive choice when money is tight. Convertibility is simply a feature the insurance company offers that allows a person to convert part or all of the policy face (pay-out) amount to a permanent insurance plan. This conversion can normally be done over a period of years, bit by bit. Converting to this option as cash flow improves is a great way to get the most insurance benefit for your dollars. So, who really buys term life insurance? Lots of people: