The financial services industry is like any other. It contains many different points of view held with varying degrees of sincerity and passion by its practitioners. Some subjects give rise to polite disagreement, while others come nearer to the status of a blood feud. One of the more polarizing discussions centers around life insurance. Most planners advocate buying bare-bones term life insurance and investing or saving separately. The insurance industry insists that its often-maligned permanent life policies, which contain a savings or investment component, are a useful financial instrument when chosen for the right reasons. Both arguments have some merit.
Term life insurance is exactly what the name indicates. It insures your life for a specified term, ranging from five to 30 years, or to a set age. The premiums are low when you're young but rapidly become prohibitive once you pass 50. Permanent life insurance is just that: a policy that remains in force for your entire life, as long as you keep up the payments. The savings or investment component of a permanent plan builds equity over time, slowly becoming a tangible asset you can borrow against. Growth within the policy is usually tax-exempt.
When you're young, permanent coverage can cost many times as much as term. By retirement age, term coverage can cost many times as much as your permanent coverage. The burning question is whether you'll still need insurance in your later years. If so, permanent coverage might make sense. Detractors point out that buying term and investing the difference conventionally usually gives higher yields and a richer retirement. However, if your estate is large or complex, probate can take time. A permanent insurance policy might be the most convenient way to discharge any short-term obligations. If you've run out tax-sheltered investments, permanent plans can also play that role.
Whole Life Policies
Whole life policies, as the name suggests, insure you from day one until your death. Premiums are usually fixed for the duration of the plan, though some companies offer a lower rate in the early years to make them more affordable. The growth of your equity, or cash value, is slow in the early years when you're covering the plan's costs. Like a mortgage, you build equity quickly in the later years. As a rule, it takes 20 years for whole life policies to begin performing at a high level. Eventually there's enough cash in the policy to let you stop paying premiums.
Universal Life Policies
Universal life policies were designed to provide more flexibility for clients to build a personalized insurance plan. They're basically a whole life policy, but they're structured to allow variations in their premiums, the coverage and the growth of cash values. By "overfunding" the policy with additional money whenever an opportunity arises, clients can speed the growth of their cash value. You can also reduce the policy's death benefits after your kids leave home, making the policy less expensive and increasing the portion of your premium that goes to build cash values. On the other hand, if times are tight, you can reduce your premium and use the cash values to make up the difference.
Variable Life Policies
Conventional whole life and universal life policies have a guaranteed death benefit, or face value. The extra cash you build within the policy is generally paid out as a supplement to the face value. With variable policies, the investment component of the policy is placed in conventional products such as mutual funds, bonds or equity stocks. These can give higher returns than a conventional whole life or universal policy, but if you die during a market downturn the death benefit could also be lower than a for conventional policy. Some variable policies offer a guaranteed minimum death benefit as a hedge against these worst-case scenarios.
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