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Should You Buy Permanent or Temporary Life Insurance?

7 tips to choose the right life insurance for you

By
Laura Adams, MBA
July 26, 2011
Episode #228

Page 1 of 2

When it comes to buying life insurance there are many different products to choose from: term, whole, universal, and variable. What the heck is the difference between these and which type is best, anyway? Keep reading and I’ll explain the differences in plain English and give you 7 tips to figure out which type of life insurance is right for you.

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Who Needs Life Insurance?

Life insurance is a contract between you and an insurance company in which they promise to pay out some amount of money if you die. Ask yourself this question: “Is there anyone who depends on my income who will be in financial trouble if I die?” If you answer “yes” then you need life insurance. I know it’s not a pleasant topic to think about, but it’s important if you have children, a stay-at-home spouse, or other family that you take care of.

Before you start shopping for a life insurance policy, you need to understand all your options. The two main types of life insurance are called temporary and permanent. Which one is best is a hotly debated topic in personal finance, so I’m going to cover the main points of each.

What is Term Life Insurance?

Temporary and permanent are the two main types of life insurance and which one is best is a hotly debated topic in personal finance.

Term or temporary life insurance provides protection for a specified period of time only, like a term of 10, 20, or 30 years. Term is the most affordable coverage because it doesn’t have any fancy features—all it offers is a pure death benefit. The price, or premium, typically stays the same each year during the term. The downside to term insurance is that once it expires the price to buy a new policy goes up as you get older.

What is Permanent Life Insurance?

Permanent life insurance, on the other hand, provides a death benefit for your entire life and it’s also an investment. A portion of each premium you pay goes into an account known as the policy’s “cash value” and it grows on a tax-deferred basis until you take a withdrawal or borrow from the policy.

The downside to permanent insurance is that it’s expensive and comes with fees and commissions that usually reduce your annual return on the investment part of the policy when compared to what you could earn in the market otherwise.

The three most common types of permanent life insurance are:

  • whole life
  • universal life
  • variable life

What is Whole Life Insurance?

A whole life policy gives you a guaranteed death benefit, a fixed annual premium, and a guaranteed rate of return on your cash value. Since those guarantees are locked in and can’t fluctuate, whole life is the most expensive life insurance product available.

What is Universal Life Insurance?

Universal life doesn’t offer the guarantees of a whole life policy, but it has more flexibility. The premiums are less expensive, but they can also increase up to a maximum amount. With universal life you get a minimum rate of return on your cash value, but it can grow more quickly because you have the ability to earn more when the financial markets go up.

What is Variable Life Insurance?

Variable life is similar to universal except that you choose how to invest your money from a menu of securities and funds. It offers the most flexibility and risk of all the permanent policies. There’s no guaranteed minimum rate of return; if the investments you pick perform well, your cash value could skyrocket, but if not, your cash value could plummet.

7 Tips to Choose the Right Life Insurance

Here are 7 tips to help you choose the right life insurance:

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