CNN Money lists the five things to know about permanent life insurance as follows:
1. It's more coverage than most people need
2. It may not be your best investment
3. But in rare cases, it's just the ticket
4. The right flavor makes all the difference...
5. ... because dumping a policy will cost you
These are pretty much in line with my thinking.
They also had some quotes worth sharing. The first is what works for most people regarding investments and insurance:
Permanent life aims to provide protection and growth. But it's usually best to seek those separately, says Daily. Plus, the policies are often so opaque that it's hard to assess the investment potential. The alternative? Buy term and invest the rest. You'll have control over expenses -- and a shot at better returns.
And the situations when permanent may be a better option:
Permanent insurance [is] useful for high earners who max out other tax-deferred savings.
Because it lasts a lifetime, a permanent policy may also make sense for older people who'll have illiquid estates -- like small-business owners -- but want to pass on money.
And finally, a quick and simple explanation of the three types of permanent insurance:
There are three main types of permanent insurance: traditional whole, universal, and variable. Whole has a fixed premium and guaranteed minimum growth. Universal allows you to raise or lower your premiums and resulting cash balance. And variable lets you choose how the cash is invested.
I talked to my insurance agent a year or so ago because I fell into the "max out other tax-deferred savings" category and the option was pretty much a wash financially between buying permanent insurance or not. Since not buying gave me a lot more flexibility and didn't take 10 years to make financial sense, I went that direction. So the point above must refer to VERY high earners or VERY wealthy individuals.
In almost all cases, term is the best option. That is what I have done to this point. However, I now find myself in a bit more unique situation. My first policies were tied to getting married and having our first child. As time has gone on, I have been presented an option of making these permanent. I normally would have passed. However, with a recent diagnosis of melanoma, I may take this option.
Posted by: JimL | April 01, 2010 at 08:48 PM
I like the idea of buying term and investing the rest. That's probably a better idea to get better returns. good tip.
Posted by: Griff | April 01, 2010 at 11:59 PM
I have experience buying both. Right after marriage, we used Dave Ramsey's advice and got everything lined up according to plan. I bought $1 mill in 30 yr term and paid $95/mo. Then, I lost my way. We were out of debt, making good income and started spending it like mad. I tried and tried to be an active investor, but just didn't have the time for the research.
I broke down and went to an independent financial adviser I really trusted, as I knew the person personally and knew their philosophy lined up with mine. They laid out this mysterious, wonderful plan that sounded awesome. Never was the term "permanent/whole life insurance" mentioned, so I bought in, only to find out that it was an insurance sales job!
I came to my senses recently and am back in term now. The thing I hate is how the salesmen are so slick, as they claim to be financial planners, but there is clearly a conflict of interest, b/c their pockets benefit greatly from the super high premiums. Coming from someone who has been through the experience, stick with term and peace of mind. Don't let the mysterious "cash value" lure you in!
Posted by: Hondo | April 02, 2010 at 12:32 AM
" It's more coverage than most people need"
Huh? Everyone I know who has whole life has less coverage than they need. Because they buy it when they are 30 and they probably need a million dollars of coverage but there is no way they can pay the premiums on that so they get 100K of insurance but feel very good about how much it will be worth when they are 75. However, they could get big gains in other vehicles by 75 as well. What they can't get is replacement income for their family if they die at 32. And that 100k will last all of about 2 years and then their family is broke. If they had 1 million in term insurance they would have bought the insurance they needed. But since they bought whole life, they got far less insurance than they needed because that got tricked into buying it for an investment rather than buying it for insurance. Insurance is first and foremost for insurance. If all your insurance needs are fully covered and you can devise other reasons to have more insurance for other purposes that may be fine. But if you buy insurance for something other than insurance and in the process end up under insured, then unfortunately you have either been tricked or you are irresponsible to those who depend on you to make wise insurance decisions.
Posted by: Apex | April 02, 2010 at 02:31 PM
MasterPo agrees with Apex.
Further, if you're buying some kind of whole life insurance as an investment, it's a waste of money. Unless you're super-duper rich and using it as a tax shelter it just doesn't pay compared to other investment choices.
OTOH, if you buy a whole life plan for a small child with the thinking they can cash it in some day or convert to an annuity payout then *maybe* it's a decent move.
Posted by: MasterPo | April 02, 2010 at 11:40 PM
Permanent life insurance certainly should not be ruled out. It is a great option for those who are looking for estate planning benefits, and for high earners like you. On the whole though, term insurance is a much better ticket chiefly because it is affordable and saves you money that you can invest in other tax-differed investment avenues. Some examples of such tax-deferred options are IRAs, education funds, Roth IRAs, 401Ks, etc. When planned in this manner, you benefit both out of life insurance and out of your investments.
Denise at AccuQuote
Disclaimer: I work for AccuQuote and this is my personal opinion.
Posted by: Denise | April 28, 2010 at 01:08 AM