What’s your most valuable asset? While you are still working, this asset may actually be your future income — so you need to protect it. And you can do so by maintaining adequate life insurance, which can help provide your family with the financial resources necessary to meet critical expenses — such as mortgage payments, college tuition, and so on — should you pass away prematurely. But what type of insurance should you purchase? There’s no one “right” answer for everyone, but by knowing some of the basics of different polices and how they relate to your specific needs, you can make an informed decision.
As its name suggests, term insurance is designed to last for a specific time period, such as five, 10 or 20 years. You pay the premiums and you get a death benefit — that is, the beneficiaries of your policy will collect the money when you pass away. In general, term insurance may be appropriate for you if you only need coverage to protect a goal with an “end date,” such as paying off your mortgage or seeing your children through college. Term insurance may also be a reasonable choice if you need a lot of coverage but can’t afford permanent insurance.
Why is permanent insurance more costly than term? Because, with permanent insurance, your premiums don’t just get you a death benefit — they also provide you with the potential opportunity to build cash value. Some types of permanent insurance may pay you a fixed rate of return, while other policies offer you the chance to put money into accounts similar to investments available through the financial markets. These variable accounts will fluctuate in value more than a fixed-rate policy, so you will need to take your risk tolerance into account when choosing among the available permanent insurance choices.
Permanent insurance may be suitable if you want to ensure a guaranteed death benefit for life, rather than just for a certain time period. Permanent insurance may also be the right choice if you have a high net worth and are seeking tax-advantaged ways of transferring wealth.
Still, you may have heard that you might be better off by “buying term and investing the difference” — that is, pay the less costly premiums for term insurance and use the savings to invest in the financial markets. However, this strategy assumes you will invest the savings rather than spend them, and it also assumes you will receive an investment return greater than the growth potential you receive from permanent insurance. Both assumptions are just that: assumptions, not guarantees. If you are considering the “buy term and invest the difference” route, you will need both a consistent investment discipline and a willingness to take a greater risk with your money, in hopes of higher returns.
In any case, your financial professional can review your situation with you and help you determine whether term or permanent insurance is best suited for your needs. But don’t delay. If you have even one other person depending on your income to maintain his or her lifestyle, you need to be covered — and once you are, you’ll consider those premium dollars to be well spent.