Galveston Life Insurance
Term vs Permanent Life Insurance
The most important decision you make when buying life insurance is which type to get: term, permanent or a combination of both.
Although the premium for term life is less expensive, the premiums for permanent life will remain the same, while the premiums for term life will increase once the term is over. That extra premium paid in the early years of the permanent policy gets invested and grows. The gain is tax-deferred if the policy is cashed in during the insured’s life. If the insured dies, the proceeds are tax-free to the owner of the policy’s beneficiary.
The saying you always hear is, “Buy term and invest the difference.” The fact is, it depends on how long you keep your policy. If you keep the permanent life policy long enough (and the market ever fully rebounds), that’s the best deal. But “long enough” varies, depending on your age, health, the types of policies chosen, interest and dividend rates, and more. The reality is that there is not a simple answer, because life insurance is not a simple product.
Guidelines to Live by When Buying
Even with all of these variables, there are some guidelines you can follow. The key is how long you plan to keep the policy. If the answer is less than 10 years, term is clearly the solution.
If it is more than 20 years, permanent life is probably the way to go. The big gray area is in between. Here is where you need an expert to run the term vs. permanent analysis for you. Of course, this assumes you keep the policy in force. Most people drop their policies within the first 10 years, but if you do your homework now, that shouldn’t be the case for you.
How to Choose
Start by assessing your needs with the DIME method. DIME is an acronym for debt, income, mortgage, and education. How much debt do you have in credit cards or student loans?
What is your annual income? Multiply that number by 10 or 20 for the number of years the insured would like to see their beneficiary receive that income. Do you have a mortgage? And finally, what is the estimate of your children’s education expense? Are they going to a state school like The University of Texas or Texas A&M where tuition is up to $10,000 annually or will they attend a private school like Vanderbilt where tuition is near $60,000 annually. Remember, your most important asset is your ability to produce income. People insure their home and their car but their most important asset is their ability to bring in a salary.
Categorize your insurance needs by their use. If you need $60,000 for college and your youngest child will graduate in three years, you need $60,000 of term insurance as a short-term hedge against your death, thus insuring that your child can finish his or her education. Meanwhile, if your estate will owe $200,000 in taxes at your death, you probably need permanent insurance, because you’re not likely to die in the next 20 years.
Once you figure out your needs, it’s time to choose the type of policy that makes most sense for you.
Term insurance is relatively easy. You can buy term insurance that stops after 10 or 20 years, or that can be continued beyond age 70. You can choose for your premium to increase each year (annual renewal term) or to remain at the same amount for a fixed number of years.
Most term policies offer both a current payment schedule and a maximum rate for each year. Most term policies are convertible to permanent without evidence of good health.
Types of Permanent Life Insurance
The real wild card in terms of price is permanent insurance, because most policies have guaranteed and non-guaranteed portions. There are three main types of permanent insurance.