Term life insurance vs permanent has been the center of active and thought provoking debate ever since the idea of term life insurance came to man's mind.Term insurance is without question cheaper than permanent life insurance but when compared with the value built into the latter people have varying ideas as to which is best. What about the cash values and dividends you get from permanent policies?From 1940 to 1970, it was very common for people to purchase whole life insurance. A policy could secure income for their family in case of an untimely death and also help subsidize their retirement planning. Term insurance wasn’t very prevalent in those days.Then, in 1981, the Tax Equity and Fiscal Responsibility Act (TEFRA) became law, and many insurance companies and banks became interest sensitive. People started questioning why they would put their money in permanent life insurance products when they could put it in the market and get rates of return at upwards of 10 to 12 percent.
Many started putting the bulk of their money in the market and then purchasing term life insurance for protection. The shift led many life insurance agents to focus on selling term insurance instead of solving the actual lifelong life insurance need.The ever constant innovation of life insurance policies make it more and more difficult to come to a consensus. The idea "term life insurance versus permanent" will continue to provoke the thoughts of anyone considering a life insurance purchase. Because term is simplest I will discuss that one first then I will get to the complexities of permanent life insurance and it's varying alternatives.
The Advantages of term policy
What life insurance companies have attempted to do with term life insurance, and have been fairly successful at doing it, is to strip the life insurance policy of as much of the front end load as possible. They have been more successful in doing this with some policies than with others.You may think that because of this success term life insurance vs permanent would no longer a debate of interest...but you would not be correct. Let us take the increasing premium term policy for example. This is a good policy to dissect when discussing term life insurance vs permanent.
The lower premiums in the younger years result from the fact that the applicant is less likely to die within a given period, the term period, than an older person. Term life insurance is life insurance in it's simplest form taking into consideration mortality based on actual experience.
If we were to examine a decreasing term life insurance policy the decreasing annual premium reflects the decrease in the death benefit each year, also bearing in mind the fact that the insured is getting older each year.People like the way this is done because they believe that at no time they are paying more than for the term life insurance they actually want.
Advantages of Lifetime policy
Comparing term life insurance vs permanent we notice that the whole life insurance premium is loaded up front. The life insurance company take most of the cost to issue a whole life policy in the first few years.There are clerical costs, medical costs if the policy is large enough or if they are dealing with an impaired risk, and of course agents commissions etc. Whole life costs more. Term life insurance vs permanent...should we continue?As you will see, we should. If the costs are less than anticipated, and they usually are, they return that portion of unused premium. This is called a cash value. This cash value earn dividends which, if left with the company, accumulate interest. There are alternate dividend options that you may elect.If you were to deduct the cash value of a life insurance policy plus the dividend after 20 years from the amount you paid in premiums you would see that the policy cost nothing over that period. But, hold on.
We have to consider what those dollars, over and above the cost of term life insurance, would have been doing had they not been in the whole life policy. What rate of interest would be available. We should also bear in mind that dividends are not guaranteed.The advocates of buying term when examining term life insurance vs permanent contend that the money would be earning the maximum over that 20 year period. On the other hand, the advocates for permanent life insurance assume that the extra premium would not be saved or invested.There is truth in both arguments but, because each person is different, we cannot come to a definite conclusion as to which is best. If you can afford to buy any policy you choose, do your comparisons for yourself and go with your gut. Term life insurance vs permanent...you decide.
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