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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 2 of 2

Tip #1: Consider the Cost

If your budget only allows a few hundred dollars a year for insurance, then a term policy will fit the bill. It’s better to have an affordable, short-term policy rather than no insurance at all. Permanent polices can be up to 10 times more expensive than term policies.

Tip #2: Calculate the Benefit Needed

Most people simply want to get the most payout that they can afford to insure that if they die, their family will be left in good financial shape. If that’s your goal, a term policy is probably best. A good rule of thumb for calculating the minimum amount of life insurance you need is to multiply the annual income you need to replace by 5. Also check out the life insurance calculators at lifehappens.org and Bankrate.com.

Tip #3: Evaluate How Long You Need Insurance

The longer you intend to keep a life insurance policy, the more a permanent policy can pay off. That’s because the cash value could grow large enough to compensate for the high premiums if you own it for at least 10 years and the market is doing well.

Tip #4: Be Clear Why You Need Insurance

Some people may not need life insurance after their kids are grown or once they retire, which tips the scales toward a term policy. However, if you need a policy to pay a beneficiary no matter when you die—perhaps to support a disabled child or to help your heirs—then a permanent policy is the way to go. You may want to consider having both a term and a permanent policy to address specific financial needs.

Tip #5: Assess Your Health

When you’re young and in good health, a term policy is cheap. But if your health is declining, a permanent policy may be the most affordable way to make sure that you can have life insurance for as long as you’ll need it. 

Tip #6: Remember the Purpose

The purpose of life insurance is to protect a beneficiary against a financial loss, not to turn a profit. If you have money to invest, a life insurance policy isn’t the most effective investing tool. You may have heard the saying “buy term and invest the rest.” However, if you’re a poor saver, a permanent policy can be a forced savings plan that will boost your wealth if you own it long enough.

Tip #7: Use Highly-Rated Insurers

A life insurance policy is only as good as the company that stands behind it. You can check out insurer ratings and get free quotes at sites like AccuQuote, Insure.com, and MatrixDirect.

Life insurance is not a simple product, which means you need to do your homework and speak to professional agents before you buy it. Depending on your situation and financial goals, a permanent policy can be a smart planning tool or an expensive hazard to avoid.  

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More Resources:
Life Insurance Estimator
ING Life Insurance Tools
 

Image from Shutterstock

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