If you’re thinking about starting a life insurance policy you’re going to have many options depending on the company you go through and how you want your policy set up. There are different ways to set up a life insurance policy and different types of policies to choose from. The two main types are Term life Insurance and Permanent life Insurance.
Term Life Insurance
Term life insurance policies are just what their name says, the policies are effective for a term of time or a certain number of years. I’m not the biggest fan of term-life policies and would only recommend a term policy in certain cases.
For instance, I would recommend a term policy if someone needed insurance for a short period of time for business purposes, or if an individual needed additional coverage on top of a permanent life policy, or if someone couldn’t afford a permanent life insurance policy at that time and eventually wanted to convert their term life policy to permanent life insurance.
The Downfalls of a Term Life Insurance Policy
1. They’re expensive.
The price really depends on your age and current health. For example, if you’re a healthy young 21-year-old, you could probably go out and buy a policy that has a $100,000 death benefit for 10 years for only $25 a month starting out. For the same policy and death benefit, a 41-year-old person’s premium rate would be closer to $100 to $300 a month depending on where they got the policy from.
The reason term life policies are expensive is because you have to pay money into them every month (the premium) and when the policy ends and you haven’t “died” you’re left uninsured with no benefit.
2. Rising Premium Rates.
Unless it’s a “Level-Premium” insurance policy where you pay higher rates at the start of the policy and your rates level down towards the end of the policy, you’ll pay just the opposite. Many term-life policies have monthly premium rates that rise over the lifespan of the policy. So when the policy begins you pay a lower rate, and the rate rises throughout the policy’s life. Insurance companies like to market term-life policies to individuals as being cheap and affordable but only go into detail on what the premium rates start out at. The 21-year-old from the example above started out paying only $25 a month their premium, but that premium would continue to increase over the 10 years or the life of the policy.
3. No Cash Value.
Most term life policies do not build cash value during the policies life. After the term of the policy has ended and you’re still above ground, you’re left with no return on the money you invested in that policy (100% profit for the insurance company).
4. You Don’t Die.
The worst part about term life policies in my opinion is at the end of the policy if you’re still alive and well you’ll no longer have life insurance. Also, if you decided after the policy has ended that you still need life insurance your premiums will be higher than they were before. This is why insurance companies make such a large amount of money off term-life policies.
Once the term-life insurance policy has ended and you still need life insurance coverage the premiums will be much higher to renew the coverage because you’ll be older. Every year older you get, you’re one year closer to death, increasing your liability to an insurance company.
Let’s say you’re now over the age of fifty, your starting rates on a new term life policy are going to be very expensive, and starting a permanent life insurance policy would be even more expensive at that age, and out of the question for many individuals.
Term-life insurance can be cost-effective if set up correctly in certain circumstances:
- If you only need coverage for a certain time period
- If you need coverage for business purposes
- If you want additional coverage on top of a permanent life insurance policy
- If you plan on converting your term life policy to a permanent life insurance policy in the future (assuming the term policy you have allows you to do that)
It’s important to be cautious when considering a term life insurance policy. Over the long-term they can become expensive and if you didn’t plan accordingly, and can leave you uninsured later on.
If you’re thinking about buying term life insurance be sure to take the time to sit down with a financial advisor and make a long-term financial plan to be sure term life insurance is right for you.
Also, as a side note, make sure you pick a financial advisor or fiduciary advisor that you know and/or trust. You want them to have your best interest in mind. If you don’t know any advisors personally you can go online and research fiduciary advisors and look at their ratings and credentials.
Permanent Life Insurance
What is Permanent Life Insurance?
Permanent Life Insurance is as its name indicates, a life insurance policy that’s “permanent” or stays with you the remainder of your life. What I like about permanent life insurance is that most of these policy types build cash value during their life. The cash value inside the policy can be used and withdrawn upon later on by the policyholder.
They Pay Dividends
Many permanent life insurance policies also pay the policyholder dividends that continue to increase as the policy matures. The dividend payments can eventually become higher than the policy’s premium making the policy self-sufficient as the dividend pays the premiums.
Tax-Efficient
Permanent life insurance policies are also tax efficient as the cash value in the policy grows tax-deferred.
Take Out a Loan
You can take out loans from the policy and technically you can get away with never having to pay the loan back. We also can’t forget about the death benefit.
An Investment
Some people think of permanent life insurance policies as an investment or retirement vehicle on top of an insurance policy. I’ve even heard it call a “tax-deferred investment vehicle covered with an insurance wrapper.”
In fact, the rich and wealthy love putting money in permanent life insurance policies because they can over fund the policies (paying more than the premium) shielding their money from taxes.
I found out that when signing client’s up for a life insurance policy or even talking to individuals about life insurance was that people DO NOT like talking about death.
Most people already knew that life insurance paid out a death benefit to their beneficiaries at the time of their death. So instead of going too far in depth about the death benefits, I liked to stress the benefits a permanent life insurance policy had while the policyholder was still living.
Starting a Permanent Life Insurance Policy When You’re Young Has Its Rewards
Many young adults have no interest in life insurance, but while you’re young is really the best time to start a life insurance policy.
By starting a permanent life insurance policy when you’re young you’ll lock in significantly lower premiums because you are young and the insurance company considers you less risk.
Young people have a longer time span to take advantage of the power of compounding interest. Your cash value grows with interest (Fixed or Variable) inside the policy.
The younger you are when you start the more time you’ll have for it to compound and grow at a tax-deferred rate!