Term Or Permanent Life Insurance?
Posted October 6, 2009 – 4:34 am in: term life insuranceI’m 44 yrs old single mom of a 19 yr old girl. My income is 55K and I’m currently running a mortgage of 144K (house estimates 250K).
I have 110K life insurance at my workplace, and I want to buy 150K more, but I’m not sure should I go with term or permanent.
Any advises will help.
Thanks,
11 Comments
Whole life insurance is a form of life insurance which has a guaranteed level death benefit until death or age 100, which ever comes first. It also builds a guaranteed cash value which will equal the face amount of the policy at age 100. So if you have coverage of $100,000 and you are still alive at age 100, the insurance company will void your life insurance policy and pay you $100,000.
Premiums remain level and there are 3 ways you can pay your premiums. The most common way is called “Straight Life” or “Continuous Premium Whole Life.” This is where you premiums continuously until you die or when you reach age 100.
The second way is called “Limited Pay.” This is where you pay a higher amount of premiums than Straight Life for a certain amount of time. Examples of this are “20-Pay Life” or “Life Paid at 60.” With “20-Pay Life” you pay your premiums for 20 years. “Life paid at 60″ means you pay your premiums until you reach 60 years old. The shorter the payment period, the higher the premiums and vice versa.
The third way is called “Single Premium Whole Life.” This is where you pay one lump of premium and never have to pay it again.
As I mentioned earlier, Whole life insurance builds cash value. You can borrow it anytime and use it for any purpose. The question is “what is this borrowing part all about?” Isn’t the savings suppose to be your money? The answer is no. The premiums you pay belongs to the insurance company.
If you want to take money out from your life insurance, you have to borrow it. The insurance company will charge you a loan interest of anywhere between 5-8%. But in the first 2 years of the policy, no cash value is accumulated. So there’s nothing you can borrow during that time. After the first 2 years, you are guaranteed an interest rate between 1-3%. When you borrow money from the cash value, your death benefit is reduced by the amount you borrowed, but the premiums remain the same. Interest charged on the amount you borrowed does not go back into your cash value. It goes directly to the insurance company.
If you die someday, the insurance company keeps your cash value and pays the death benefit only.
If someday, you decide you want to cancel your whole life policy, you will get most of your cash value. When you cancel your life policy, the insurance company may charge you a surrender charge on your cash value. If you borrowed money from your cash value, it is important that you pay this loan back before canceling the policy. Failure to do so will result in income tax on the loan amount.
In summary, here are the pros and cons of whole life insurance:
PROS
1) You are guaranteed coverage until you die or reach age 100, whichever is first.
2) Premiums remain level.
3) It builds cash value.
CONS
1) It builds cash value, which makes this type of life policy very expensive.
2) Cash value grows at a low rate of return
3) If you want to use the cash value, you have to borrow it and pay loan interest of 5-8%
4) If you die, the insurance company keeps your cash value.
Term insurance is designed to provide death protection for a definite and limited period of time such as One Year Term, Five Year Term, 30 year Term, or Term to 65. If the insured dies during the term, the policy matures and the insurance company pays the face amount of the policy to the beneficiary. If the insured doesn’t die during the term, the policy expires.
The second most important characteristic of Term insurance is that it is pure insurance. You pay premiums only for the coverage. Since there are no forced savings or cash value attached to Term insurance, it is designed to provide the greatest possible protection for the lowest possible cost. Therefore, the two key points to remember about Term insurance are that if offers (1) protection only for a (2) a specified period of time.
One of the most widely marketed forms of Term insurance is Annually Renewable Term (ART). The insurance company grants the insured the right to renew the policy each year to a stated date or age. The cost to renew the policy goes up each year because the rates are based on the insured’s attained or current age.
The increasing in premiums can present a real problem for the insuring public. One Term product that provides a partial solution to the rising costs is Level Premium Term. With a policy of l0ng duration, the payment may be leveled out over the life of the policy to create Level Premium Term. The cost of Level Premium Term is calculated by price of the early years by the price of the later years. So in the beginning, you are making an overpayment of what the actual cost of insurance is. But in the later years, you are making an underpayment of what the actual cost of the insurance is. Why? Because the cost to insure someone is young is low compare to the cost of insuring someone who is old.
Term insurance, then, in any of its many forms, is the most affordable protection available for teh premium
“btw, the agent gets paid a LOT more to sell you “permanent” insurance — which should tell you immediately that the insurance company makes a lot more from that product and therefore that you do NOT want it.”
Most companies don’t pay a “LOT” more when their agents sell permanent insurance. The commission is usually dependent on the premium. If a client is spending $100/month on their insurance, whether they spend it on term or permanent, the commission isn’t all that different. You’re using a standard argument used by term-only salespeople where the commission per thousand dollars of coverage WOULD make permanent a higher commission. However, most clients have a budget in mind and the commission won’t vary much based upon the amount spent.
Now, on to the original question…No one here can give you a professional answer based upon the information provided. You should sit with a full-time professional to assess your actual needs. Don’t take advice from people on here who are mostly unqualified.
There are many different kinds of life insurance policies and even more companies than you’d think that offer them. The popular kinds of life insurance are term life insurance, return of premium term (which can effectively yield you a 5-7% tax free return on your money), and policies to last until you’re 100 years old. In your case a term policy seems quite appropriate.
You want to find an insurance broker to help you sort through them. In the interim though, on my site I have a tool you can use to price out insurance companies. This will allow you to get prices for life insurance policies from ~150 different companies so you can get insurance prices prior to contacting a broker. That way you can be sure you’re getting a good deal. The information and quotes are provided for your information and the tool does not require any personal information to use.
Most folks benefit from term. It is less expensive and should give your beneficiaries a nice cushion over the next 20 or 30 year. Should you change jobs, you might lose that life coverage as well. You would want enough to take care of your daughters education and possibly other life expenses.
You can do a term life policy with a return of premium rider (will cost about 30% – 50% more) if you are just looking for the protection and get all your premium back at the end of the term. You can also barrow against the value of the policy as it matures if needed, where a true term policy you cannot.
9 iron or 3 wood?
Ford Focus or Cadillac STS?
What do you want the insurance to do? You have left out a lot of information that is NECESSARY to answer your question.
What are your other debts? What is your income & savings? What are your future plans for your house and for yourself? How much of the life insurance death benefits from your workplace insurance will you lose to taxes? What type of life insurance do you have through work? What are its features? Will you lose it if you leave work?
What about disability insurance?
What about your future bills like for medical care not covered by Medicare when you are a senior?
Is your daughter a “special needs” child or is she independent but lives with you? Still in school? Her income?
Do you have all your legal documents in place?
Is there any chance you could be sued for any reason? (if you answer no, you are in dreamland).
Meet with a professional to discuss all your options – a financial planner or insurance agent. Map out a realistic plan for your life. Consider buying both term and permanent insurance.
Good Luck
term, guaranteed renewable. you won’t need the insurance forever.
btw, the agent gets paid a LOT more to sell you “permanent” insurance — which should tell you immediately that the insurance company makes a lot more from that product and therefore that you do NOT want it.
If the goal is to leave behind some money for your daughter than you should go for a permanent life policy. You already have a mortgage and term insurance from your workplace and hence term would not serve any purpose.
No idea – what do you want the insurance to DO for you? What’s the GOAL?
No way to pick the proper tool, until you define the GOAL. Keep in mind, debt is not inheritable.
20 or 30-year level term insurance will give you the most “bangk for the buck.”
Hi,
I am doing investment and all kinds of insurance. Mail your question to friend74@ymail.com. I need your place of living must to reply.
Bye