The Ultimate Life Insurance Question: Term or Permanent?

After you decide to purchase life insurance, you face your first of many decisions: Term or Permanent Life Insurance? It all depends on age, family situation, and needs. The two kinds of life insurance are appropriate for different situations. Term insurance is designed for those who are interested solely in a death benefit; for example, a young father who wants insurance so that his child will be able to afford college if Dad is not around to pay the bills. There is no cash value to this kind of insurance, so the premiums are usually lower than they are for permanent insurance. But as the insured gets older, the premiums increase.

Permanent insurance combines a death benefit with a cash value, or savings component, which grows tax-deferred. Many policyholders borrow from the cash value to pay for things such as a college education, or convert their cash value into a retirement fund.

Because of the savings component, permanent life insurance may cost more than term life, especially at the beginning. But the premium remains fixed for the life of the policy.

Many people are familiar with the saying “buy term and invest the difference,” which suggests going for the lower premiums and taking care of the savings component on your own rather than counting on the insurance policy for investment growth. Various types of permanent insurance plans, however, do give the insured the option of deciding how the savings is invested, and if you let the insurance company take care of the investment, there is usually a minimum interest which diminishes the risk of investment.

While term insurance often starts out cheaper, permanent life offers several advantages over a term policy, financial experts say. Because premiums don’t escalate, a permanent policy is more likely to be held until death and actually pay a death benefit than is a term policy, which can get quite expensive as the insured ages. And the death benefit will pass to beneficiaries tax-free. There’s a tax advantage to permanent life, because cash values will grow at a tax-deferred rate. With no cash value, there’s no tax advantage to term life. If you go with cheaper term insurance, you should make a commitment to a regular savings and investment program.