Life insurance: Are you in it for the short or long game?
What life insurance should I buy?
What life insurance is going to protect my family the best?
First a simple rule of thumb:
Take a look at your insurance needs.
If you need the insurance for less than ten years, buy term.
If you need the insurance for greater than 20 years, buy permanent.
I love rules of thumb because they are quick, and if not always accurate they point you in the right direction.
Term is temporary insurance:
Term insurance is designed to give your family protection for a set length of time. 85% of life insurance policies sold are term policies but only 2-3% ever pay a dime. The reason is they are cheap is because you are young healthy and are not likely to die.
- Inexpensive up to 20 times less than permanent insurance.
- Simple to understand: You pay, and if against the odds you die, they pay.
- Can have a level price for a set length of time 5, 10, 15, 20, 30 years.
- Gets very expensive as you get older.
- Hard to get policies after 70, or if you are not in good health.
- May have to submit to multiple medical exams.
- May not be able to get insurance due to illness or as you age.
- No cash value.
Permanent Insurance is for the long haul.
Permanent insurance is designed to protect your family for life. Permanent policies are priced with the idea that 100% of policies will pay. As you age, or become ill you won’t lose your insurance. Permanent insurance has a savings or financial part to it that can give you some awesome benefits.
- Provides protection for life
- Whole life can give you a level price for life.
- Builds cash value up to 4+% tax deferred.
- Can be used as forced savings if you have trouble saving money.
- Can earn dividends on top of guaranteed cash values.
- Cash value can be borrowed against.
- Can be used to leave a legacy no matter what happens to your personal finances.
- Can be used for “living benefits” – paying for medical treatments, long-term care, etc…
- More expensive; much more expensive.
- More complex, with many more options.
- You may be able to get better returns using an investment.
- You don’t have instant access to policy or loan funds.
How does this work for the average American?
Well lets look at two average American guys.
One man buys insurance as a healthy 20-year-old, non-smoker in good health and he out lives the average American to a ripe old age of 90.
[table id=1 /]
The next man also buys insurance as a healthy 20-year-old, non-smoker in good health, but at age 50 he as major health issues for only 6 months then makes a full recovery. 43.92% of American males will get cancer, and 11.3% will get heart disease. What happens to his life insurance options then? He beats the odds still and lives to the ripe old age of 90.
[table id=2 /]
Wow, if you live as long as the average American a little over 77 years, you could pay a lot to the insurance companies and your family wouldn’t get a dime. Insurance companies like term insurance because they know they only have to pay out 2-3% of the time. Permanent insurance is the only way to guarantee protection for your family.
As you can see from a purely insurance protection standpoint, permanent insurance has some significant advantages. It has several other advantages and uses that I will cover in a few weeks.
My Term vs Permanent Life Insurance Recommendations:
At minimum I recommend a permanent whole life policy large enough to cover funeral, final expenses, and debts.
say 25,000 to $100,000. This will be higher than the same amount of term insurance but gives you the protection, and peace of mind that as long as you keep paying the policy you will always have insurance.
Buy term to make up the difference in what your needs are: How much life insurance do i need rule of thumb.
make sure it can be converted without requiring proof that you are insurable (in good health).