Thursday, October 29, 2015

Deciding on the Right Life Insurance for You


The Value of Life Insurance

With unwavering certainty, we can see the value for life insurance. Even though we do, sometimes our budget doesn’t.  This disconnect creates a contrast between knowing what is right and doing what is right to put insurance in its rightful place.  If anyone thinks paying insurance premiums is like throwing money away then maybe they don’t have the right type of insurance.  If you could see the value in your premiums providing protection and generating savings, then your attitude about insurance might change. Understanding the differences between the two types, term insurance and permanent insurance, helps differentiate their purposes for different stages in life.

Term Life Insurance

As the description suggests, “term insurance” means “protection for a specific period of time” and is often viewed as “temporary insurance”.  Term insurance is designed to provide a fixed amount of coverage for periods of 10 and 20 years until age 85 at which time the coverage will expire.  As expected, the cost of premiums increases with each renewal period.  Term insurance fills a need when the risks are the greatest. Some examples are when you have a large amount of debt or when you have dependents relying on financial support.   

Permanent Life Insurance

“Permanent insurance” is designed to remain “fixed” both in relation to the amount of coverage and the cost of premiums. The benefit of a permanent life insurance is to provide ongoing protection for a lifetime.  Because we don’t have an expiration date stamped at the bottom of our feet, timing our deaths is impossible.  If you need insurance to support your spouse, pay income taxes on registered investments, or capital gains on your death, then permanent insurance fulfills these needs. Certainly, if you can’t come to grips with rising insurance premiums, which can be expected with term insurance, you will appreciate having a permanent insurance policy because the premiums are constant.   

The chart below illustrates the premiums for $100,000 of coverage with both term and permanent insurance, for a 20 year old, non-smoking male.


Monthly Premiums


Term Insurance

Monthly Premiums


Permanent Insurance


$    13.56



$    49.79



$  275.97



The teeter-totter outcome shows that the term premiums are lower when a person is younger in comparison to the permanent premiums.  As one ages, the term premiums are higher in comparison to the permanent premiums. All the while, the permanent insurance premium remained constant. The interesting fact is if this male lives to 100 years old, he will pay total premiums of $49,305.60 ($51.36 x 12 months x 80 years) and his estate will receive a pay-out of $100,000.

The above example of permanent insurance is a Term-100 policy where the premiums are required to be paid until a person is 100 years old. Then the policy is considered paid-up. With a permanent life insurance policy, you can choose a fixed annual or monthly premium, like the example above, payable for an entire lifetime or you can choose a fixed annual or monthly premium set for a specific period.  Choosing a paid-up permanent life insurance policy of 10, 20, or 30 years makes financial sense since you can finance the premiums while you are working. You will have protection in place for both the present and the future. The benefit of a paid-up policy is the premiums retire when you do. 

Participating Life Insurance

Another twist is if you are interested in sharing in the profits of the insurance company, you could choose a participating life insurance.  As a policyholder you would receive dividends which allow you to build additional value within your policy.  This type of insurance has more frills than a Term-100 but the cadillac of permanent insurance is Universal Life.

Universal Life Insurance   

Universal Life Insurance (UL) provides flexible coverage, deposits, and investments.  This type of permanent insurance combines both your need for insurance protection and an investment savings account. When you contribute more than is required, you trick your mind into “over-funding” your insurance policy. A portion is paying for the pure insurance component with the balance accumulating in a “savings” plan which allows you could do a number of things with the cash, including paying for future premiums.

Deriving value from the premiums may not be a sole reason for choosing to purchase life insurance.  Perhaps the main concern lies in the affordability.  Having an attitude that says “I don’t expect anything to happen but I am prepared in the event it does” speaks to the value of buying peace of mind. 

What’s the Right Choice for Me?

Think of a single person today who may someday marry and eventually have four children.  Think of an entrepreneur who has a business and a family to protect.  Think of someone who currently has more debt and limited savings but will turn his situation around to have less debt and boundless savings.  Now think about your own situation. Your protection needs will change with time. Since everyone’s life patterns are different, your needs will be different too.

Blending both term and permanent insurance may make financial sense.  You are trying to optimally match protection with cost and needs now and in the future. Even if you begin with term insurance, you have the option to convert your coverage to permanent insurance when your budget permits you to do so.  With so many strategies available, the only way you will know what is right for you is to meet with an insurance representative.

Here’s your motivation.  

“Just Do It” may have been a highly successful campaign launched in 1988 for Nike, the shoe company.  But I believe there is profound truth in taking action about anything and everything.  Procrastination doesn’t accomplish anything. Making the call to schedule an appointment with your insurance representative means you have to “Just Do It”.   Keep your promise to your family and yourself.  

1 comment:

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