"Love is what we are born with. Fear is what we learned here." - unknown
One day, your term life insurer will send you a notice suggesting that you could make the policy permanent. Should you consider the offer?
This happened to me recently and will in all likelihood happen to you. When it does, you will be faced with the decision to convert your term life insurance policy to a permanent version. It was tempting to consider.
The differences in what these two types of policies offer: a policy that expires at the end of a fixed term (usually twenty years) and one that never ends. For the vast majority of folks reading this, term is the answer. It is affordable, serves a distinct purpose and allows you to fund numerous additional accounts such a savings for college, retirement investments and even your mortgage.
But term life insurance suggest certain financial requirements. In and of itself, term doesn't do much more than give coverage to those you love in the event of your death. The understanding that this policy will leave room in your budget to control potential debt issues, allow you to create and emergency account and keep your retirement investments funded. But you have to do this to make the equation work.
Permanent life insurance offers a savings component that many find alluring. The chance that you will be able to pay the premiums on the policy from this accumulated savings is not as it appears. Most policies will never be held long enough (in insurance parlance, the policy will be whole and self-sustaining if you hold it for 100 years) to prove worth the additional costs. And those costs can be quite high.
Term life insurance provides for the short-term, a point in life where your absence would have the greatest impact on those the policy would benefit. It is an emergency plan.
Tony Steuer, author of The Questions and Answers on Life Insurance Workbook: A Step-by-Step Guide to Simple Answers for Your Complex Questions
suggests this about permanent life insurance: "Everything else being equal, the main reasons to purchase permanent insurance are: (1) if you have a dependent, such as a special-needs child or handicapped loved one, who relies almost solely on your income to live and who will need to rely on it after your death in perpetuity, or (2) if you have few, if any, other assets and don’t actively plan on having any that could be used to cover the cost of your funeral, to pay off any outstanding debts, or to provide some inheritance to your family."
Studies have shown that term life insurance policies are used only one percent of the time. And while they offer no cash build-up, the premiums are significantly lower (with one exception: level term will adjust for each term and because you get older with each passing year, the premium is likely to increase).
If you buy term at a young enough age, say in your thirties, you can renew the policy at the term's end even if your health has changed. Expect your premiums to be higher because your older but protecting your assets and your family an additional twenty years can be enticing.
Term policies also offer the biggest bang for the spent dollar. Coverage for similar premium costs is often four to five times what a permanent policy offers. In other words, more coverage for less cost.
Are there pros to owning permanent life? Perhaps and this will boil down to your individual circumstances. But each consideration comes with a cost that diverts money from much better investment opportunities.
And no, I chose to stay with my seven year old term policy and not accept the offer to go permanent. This allows me to (theoretically) save the difference for retirement. And because there is an element of luck (that I won't be one of the previously mentioned one percent), I will have massed enough in retirement savings to replace the policies payout - one that I or my beneficiaries may not have needed.
If I could add one thing: A term policy might be a great way to add to an estate plan for those with extended families. Bought later in life, this sort of insurance planning will create a better chance that you will leave something in addition to what you have accumulated for those a generation or two removed from your heirs.
