When it comes to buying life insurance, you have two options, term life and permanent life. Many people wonder what the differences are and what life insurance they should select. What it comes down to is personal wants, needs, and sometimes risk tolerance. It’s no easy decision to make, but the best place to start is with what you actually need. Once we figure that out, it’s a matter of matching your needs with the right plan.
Term Life Insurance
Term life insurance is the cheapest life insurance you can buy. It is just as it sounds. It’s life insurance for a term of 10, 15, or 20+ years etc. When the term ends, you’re no longer covered. So as you can see, it covers a temporary need, like if you have a mortgage on a home, and you die unexpectedly, the insurance is designed to pay off your home. If you have kids, you can get them some replacement income that they otherwise will lose because of your death.
Term life insurance isn’t the best kind of insurance to cover a burial or funeral, because there’s a good chance that you’ll outlive it, or if you’re older, it’s hard to qualify for it.
Some people don’t like the idea that it’s temporary, but when you keep in mind that it’s supposed to cover a temporary need, it makes sense.
Permanent Life Insurance
Permanent life insurance is your other option. It’s permanent, it’ll last forever, and be in place when you pass away. It also comes with a cash account that grows over time like an investment. However, permanent life insurance is more expensive than term life insurance. It’s not the best option to cover a temporary need because of that.
Permanent life insurance can be used in one of two ways.
The first way is to max fund it and use it like an investment, and it will grow at a similar rate to a bond account, with around 3-5 percent annual interest credited. No matter what the stock market does, you’ll never lose money. The problem with this strategy is that it takes around 10 years for this investment to break even, and close to 20 years to see the actual return. The main risk is that if you become unemployed for a long time and can’t pay your premium, you have to cash out, and if it’s in the first 10 years, you will have lost money. Overall, there are other investment tools that will grow at a faster rate than life insurance, although they are slightly riskier in terms of losing money.
The other way to use permanent life insurance is to pay for a small burial or funeral, otherwise known as a final expense plan. This option is mainly for people that are past middle age, and for whatever reason cannot qualify for term life insurance, or don’t have any temporary needs to fill. It’s also for people that don’t have enough savings, and/or aren’t comfortable with using their savings to pay for their funeral.
So the question is, do you have enough savings to pay for a funeral, and even if so, would it be easier to make small monthly payments to take care of that final expense? Do you have any temporary needs like a mortgage or dependent children, etc.? Do you want to use life insurance as an investment, even if it takes 10 years to break even, and 20 years to show a return? Those are just the beginning questions one must ask before determining the best plan for themselves.
Buy term, invest the difference
Many people are choosing to buy term life insurance and invest in things like IRAs and mutual funds, with their goal being to have enough savings to self-insure their own funeral when they get older. This is all good and well, but some things don’t always work out the way you want them to, and it would be wise to not be staunchly against or for any particular kind of life insurance. Even with savings, if you figure you only have 10 or 20 more years to live, it might be cheaper to just buy a final expense policy than to use your savings, for which you might need to for other things.
Conclusion
Buying life insurance is not a simple process and nothing is uniform across the board. Many factors go into deciding what’s right for your situation, and it’s prudent to go over all of those considerations with a professional.
Blue Crush Insurance
