What You should Know About Permanent Life Insurance

A recent article on CNN Money lists five things you should know about permanent life insurance:

1.  It might be more coverage than you need… or at least coverage for longer than you need.  Because permanent life insurance is so much more expensive than term life insurance, people might get a lower face value than they really need, but end up with life insurance long after their children are grown and the house is paid off.  It usually makes more sense to purchase a less expensive, higher face value term policy, which will truly provide financial protection to your family while they need it – ie, while children are young, college still has to be funded, and payments are still being made on the house.

2.  It may not be your best investment.  The idea with permanent life insurance is that it provides a death benefit, but also builds cash value via investments.  But for most people, it makes more sense to purchase insurance separately from investments.  It’s hard to tell where your money is being invested in a permanent life insurance policy.

3.  But in rare cases, it’s just the ticket.  I would say that these are very rare cases, but they do happen.

4.  The right flavor makes all the difference.  Deciding among the three types of permanent life insurance policies (universal, variable, and whole) will likely require extensive research and/or a meeting with a financial advisor.

5.  Dumping a policy will cost you.  It takes many years for the cash value in permanent life insurance policies to build up to a significant amount of money.  If you cancel a term policy early, you’ve only paid for the life insurance protection you got during the years you had the policy.  But if you cancel a permanent policy in the first 10 or 15 years, you will likely have paid a lot of money (above and beyond what you would have paid for just having the death benefit of a term policy) and get very little in return.  A permanent policy is really only appropriate if you know that you’ll stick with the policy for the long term.

Permanent life insurance is a good option for some people.  But if you choose to purchase it, make sure that your decision is based on independent research or advice from a qualified professional who does not have a vested interest in your decision.  The premiums – and thus the commissions – are significantly higher on permanent life insurance policies; if the person advising you to opt for a permanent policy is also making a commission based on the policy you buy, you might want to get a second opinion.

Comments

  1. Scorpion says:

    Several years ago, my wife and I got return of premium policies because it wasn’t a bad deal. We figured that the extra amount being charged was like the investment and the amount we would have paid for a straight term policy was like the dividend. Over the 30 year term, it’s like we would have invested in a CD or bond with a 6.2% return. I just figured that into the fixed portion of my portfolio.

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