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Term vs. Permanent Life Insurance

Choosing which type of policy to purchase is the biggest decisions you will make while purchasing life insurance. There are numerous advantages and disadvantages to each type of policy, but it mostly depends on your savings mentality and individual financial situation.

I like to compare term insurance to renting, where God is your landlord and the property manager is your insurance company.  The cost of renting may seem less than buying, but often prices go up over time and when your lease is up, you have nothing to show for it. 

With Term Insurance you have a temporary roof over your head that lasts for a time, but once your term is up, the protection is gone.  Its not such a bag thing and when purchased for the right reasons, buying Term can make a lot of sense, especially in your early income years when you need lots of coverage to:  replace loss of income, payoff a mortgage and put children through college.  But in my opinion, protection is the most important aspect of life insurance.  If you’re going to buy the protection anyway, wouldn’t you want your dollars to go where you need it most? Put another way, the best life insurance policy is one that will be in-force when you die.  The value is in the financial protection it offers your family, yet that protection disappears after the term runs out. 

Term is cheaper because most people never end up actually reaping benefits from their policies. In fact, Northwestern Mutual recently did a study on all of the life insurance contracts, roughly 50% were permanent, 50% were term.  Get this… 97% of all their claims were from permanent policies.  In other words, only 6% of their term policy holders reaped a financial benefit.  Why?  Because the majority of their term policies expired, lapsed or were converted to permanent insurance before the insured died.

Permanent life insurance is like owning a house and paying a mortgage.  Each payment builds equity until sooner than later you own your home.  The protection might have a higher price, but it comes at a significantly lower cost over time – and it lasts for your entire life.

We hear all the time our clients say that permanent insurance is “too expensive.” But are they referring to the price or the cost?  The price maybe lower in the onset but the cost can end up being much lower. 

I look at term premiums as an expense similar to your auto insurance.  Sure its there if you ever wreck your car, but if not you have nothing but peace of mind that you had protection.  Permanent insurance on the other hand is an asset.  If you own a $100,000 permanent policy, you have $100,000, maybe not today, but your family will have it sometime in the future. 

Investors look at it the same way.  Savy institutional investors looking to diversify their portfolios like Warren Buffet will buy permanent policies’ rights to the insurance benefits because they know at some point they will receive a payoff.  They won’t buy a term.

We have been market leaders in the term insurance since we started the first national term quoting agency in America InsuranceQuote Services back in 1984.  Over the years we have helped more than 50,000 people buy Term Life insurance.  We did it because it is a cheap way to buy a lot of coverage for a little.  I have witnessed first-hand the value of term insurance when a close friend suddenly passed in his 40’s.  The Insurance Benefit his family received was able to put his children through college and payoff the house.  

But now after nearly 40 years in the business, I am seeing our Term clients’ policies run their course.  In fact, I had to hire a full time staff member just to keep track of our clients’ lapsing term policies.  The good news is they were fortunate to outlive their terms.  The bad news is their premiums are 10, 20 or even 30 times more if they want to continue their coverage. 

If you can afford to do so, I recommend Permanent coverage.  There are some fabulous new Flexible Premium Universal Life policies out today that not only guarantee a lifetime of coverage, but also have built in Long-Term-Care/Chronic Illness benefits you can use from the Life Insurance benefit while you are living. 

If you can't make up your mind between the two, check out Return of Premium Term Life where you get ALL of your premiums back at the end of your term.

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