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When it comes to life insurance, a certain debate has raged for decades and it is unlikely to go away any time soon. This big debate revolves around one big question: should you buy permanent or term life insurance?
Well, in all honesty, there is no simple answer. It totally depends on individual factors and circumstances in order to determine which policy should be chosen. What’s important is that you know all the facts so that you can make an informed decision on which is best for you.
First, a reminder of the two major types of life insurance policies available. Permanent life insurance offers you guaranteed death benefits, even if you fall ill shortly after you have agreed to the policy. It also has a cash value system, where an amount from your premiums is invested in a separate account that you can draw from while you are still alive. Depending on the interest and dividends, the cash value can potentially offset the premiums, thus making a permanent life insurance policy a smart investment if you start the policy at a young age to allow the interest to increase on your cash value when you grow older. This works especially well because rates for permanent life insurance stay the same throughout the course of the policy, so when you’re younger there is more cash value available because it is cheaper to insure you.
Term life insurance offers guaranteed death benefits, but only for a certain agreed time, after which your family won’t be able to receive a penny from the insurer. With term life insurance, your premiums increase as you grow older, and there is no cash value system.
On first glance, permanent life insurance looks a lot more favourable. However, it is, unsurprisingly, significantly more expensive than term life insurance. The policy becomes worth the money if you keep it for a long period of time, because the amount put into your cash value will increase constantly and the cash value will have earned interest, dividends or both in that time. This can mean that you offset your premiums and that you can even get back more than you paid in.
However, you have to remember that unless you keep the policy for a long period of time, then the cash value will not offset your premiums. In terms of investment, you have not broken even with the money you put in. Therefore, it is generally advisable to invest in permanent life insurance if you are going to stick with the policy for more than 20 years. If you are thinking more in the region of ten years or under, opt for term because it will work out cheaper.
It also depends on what financial support your family will require. For example, if your child will require cash for school fees in the next three years then it is advisable to choose term so that in the event of your death, their education will be paid for. On the other hand, if you have a colossal mortgage that will take the next twenty-five years to pay off, you’ll want permanent life insurance (assuming that you hope not to die within the next twenty years!)
This debate will continue to rage as there are many other factors involved, but with this simple advice, you should now know when it’s a good idea to go term, and when it’s best to opt for the long haul and take permanent life insurance!