Choosing Term or Permanent Life Insurance

Few people who have shopped for, or purchased, life insurance have escaped this debate. The reality is there is not a simple answer because life insurance is not a simple product. And the wrong kind of life insurance can do more damage to your financial plans than just about any other financial product today.

The first and most important decision you must make when buying life insurance is: term, permanent or a combination of both? Both term and permanent insurance use the same mortality tables for calculating the cost of insurance. However, the premiums for term insurance are substantially lower than those for permanent insurance.

The reason for the price difference is that term programs might expire without paying out. Permanent programs will always pay out eventually.

There are many forms of term coverage available: annual renewable, levelterm and return of premium are just a few.

* Annual renewable term (ART)

is the simplest form of term life. In this form, the premium is paid for one year of coverage, but the policy is guaranteed to be continued each year for a given period of years. This period varies from 10 to 30 years, or occasionally to age 95. As the insured ages, the premiums increase with each renewal period, eventually becoming financially unviable as the rates would eventually exceed the cost of a permanent policy.

* Level-term insurance programs guarantee a level premium for a given period of years. The most common terms are 10,15, 20 and 30 years. In this form, the premium paid each year remains the same for the duration of the contract. The longer the term the premium is level, the higher the premium because the older, more-expensive-toinsure years are averaged into the cost.

* Return of premium-As the title suggests, this form of coverage provides a return of some of the premiums paid if you outlive the duration of the term of the policy. This coverage is typically more expensive than annual renewable or level-term policies.

* Permanent life insurance is much more expensive than term insurance because it is an investment and can never be cancelled. With a permanent policy, your premium payments for the first few years cover more than the insurance company’s cost of your risk of death. The excess money goes into a reserve account to be invested by the insurance company. These investments yield returns in the form of interest and dividends. A portion of these returns are passed along to you. You can borrow against them or add them to your policy reserves.

Even with all of these variables, there are some guidelines you can follow. If you plan to keep the policy for 10 years or less, term is likely your best option. More than 20 years, permanent insurance is your best bet.

Talk with an insurance agent or financial planner before your options become too limited. He or she will help you identify and plan for your best financial protection.

Choosing Term or Permanent Life Insurance