Good investments are hard to come by right now. You may have heard permanent life insurance - also known as whole life or universal - mentioned as a good investment option. It's important, however, to know the pros and cons of permanent life insurance before deciding whether or not to buy a policy.
(ARA) - Good investments are hard to come by right now. You may have heard permanent life insurance - also known as whole life or universal - mentioned as a good investment option. It's important, however, to know the pros and cons of permanent life insurance before deciding whether or not to buy a policy.
While both permanent and term life insurance pay the named beneficiary upon the death of the insured, permanent life insurance plans include "living values" in the form of cash . These values can be accessed in the form of policy loans, withdrawals and also by surrendering the policy.
"A permanent life insurance policy is a type of 'forced savings' plan. However, keep in mind, assuming the same death benefit, the premiums on these types of plans are generally five to 12 times as much as a level term policy," says Byron Udell, founder and CEO of AccuQuote.
"A permanent policy will typically not work out well for you unless you're prepared to stick with it for a long time. Unfortunately, most people aren't able to afford the face amount of insurance they need to protect their family in a permanent insurance chassis," he says. "Even if they stretch their budget to buy permanent coverage, they often lose the faith and bail out too early. When this happens, they find out that they'd have been better off never having started the plan. They have no life insurance protection, and the surrender values add up to abysmal results on the 'investment' side of the transaction."
Udell prefers term life insurance for most people because it is affordable, making them less likely to lapse their policy. "The main purpose of having a life insurance policy should be to protect your family," says Udell. "Term life insurance accomplishes this need for a lot less. If you are determined to consider permanent coverage, you might consider the old adage, 'buy term and invest the difference.' Simply take the cost difference between a permanent policy and term policy and invest that money."
According to AccuQuote, at today's rates (which are the lowest in the history of life insurance), the annual premium for a 40-year-old male (non-smoker) in good health for a $500,000, 20-year term level term life insurance policy is only about $350.
To get a real sense of the value of term, compare a term policy and a universal life policy. A healthy 40-year-old nonsmoking male would have to pay about $3,000 per year to acquire a $500,000 universal policy. For the first few years, most of these policies have zero surrender value. But say he had instead invested $2,650 (the difference between $3,000, the cost of the universal policy, and $350, the cost of a term policy) in a mutual fund that averaged a total return of 10 percent annually. At the end of the first year, he'd have $2,841, accounting for taxes on the earnings at a 28 percent rate. At the end of 10 years, he would have accumulated more than $46,000 in after-tax savings in the mutual fund. Over the same period, the cash value of the policy would likely have climbed only to about $21,558.
AccuQuote provides these tips when shopping for a term life insurance policy:
1) Comparison shop but don't get lured by "come on" term life insurance rates.
2) Buy a term life insurance policy worth at least seven to 10 times the breadwinner's annual salary.
3) Buy from a reputable term life insurance company that is financially stable.
4) Review life insurance needs every two to three years.
AccuQuote offers an extensive selection of life insurance options, including term life, whole life, and universal life, as well as selected annuities. Click here for a free term life insurance quote or call (800) 541-5917 to learn more. AccuQuote's experienced agents will answer any questions you have and provide you with life insurance quotes from several leading life insurance companies.
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