Term vs. Perm Life Insurance

Over the past few weeks, I’ve received a number of questions regarding term vs. permanent life insurance. I guess salespeople are on the prowl in this challenging economy.

First, let’s define the two:  

• Term – temporary life insurance for a specified amount of time (generally 10-30 years)
• Perm – permanent life insurance with an associated ‘cash value’ (these policies have names like whole life, universal life, variable universal life, etc.)

At the core, the main difference between term and perm insurance is the first (term) is just life insurance for a set amount of time. The second (perm) lasts forever and has an attached savings account. The idea of having a savings account and life insurance for life is appealing but remember, you're paying for it.

So what’s the right policy for you? Here are some things to consider:

• How much insurance do you need? Before even thinking about a policy, you should calculate how much insurance you need in case of an untimely death. Insurance is not to get rich. Instead, it temporarily fills a financial need if something catastrophic (aka death) happens.  Over time, your savings should go up, children become adults and your life insurance needs go down.
• What can you afford?  Perm policies can run 8-15x more than term policies for the same death benefit (amount you get). In other words, a healthy young person can get a $1M term policy for under $100/month while the same perm policy may run $1,000/month. The perm policy is applying $100 to the insurance and investing the remaining $900 on your behalf. I think you can do that yourself.
• How flexible is the policy (what could you lose)? If you can’t afford your premiums on either policy, you lose your money.  With perm, you lose more.  Yes, there are options to reduce premiums but it impacts your cash value and death benefit. Simply put, once you’re in a perm policy, you’re in for the long haul.
• Do you have any special circumstances? If you have special needs children or estate tax issues, a perm policy can make sense. These situations require funds after your death no matter when it happens.
• Do you understand what you’re buying? Permanent policies can be confusing. All the rules, fine print, structures, etc. If you don’t know what you’re buying, avoid it. You may get the "hard sell" but better to spend your time learning a product then jump into something you don’t know.

Life insurance is a critical component of a stable financial plan – you need it. For most people, term policies are sufficient and address the need. If you’re thinking about a permanent policy, make sure you understand the downside before you get locked in. I’ve seen many families struggling to meet the premiums of a life insurance policy they don’t need and should not have purchased.

What are your thoughts on term vs. perm policies? Which type of policy do you have and what do you like/dislike about it?