So you’ve recently met with an insurance advisor and his suggestion about life insurance has thrown a wrench in your budget. Were you hoping to hear about reasonably priced term life plans, and instead he had the full court press on about a permanent life insurance product.
Now you and your spouse are left to wonder if you should either expand your budget to accommodate the permanent plan, or if his suggestion is useful at all.
A lot of couples face this same problem, so before you agree to your advisors plan make sure you are aware of the issues that buying a permanent policy can have on your finances.
What is a permanent policy?
Sometimes called a whole life policy, a permanent policy is one where you pay a monthly premium to the insurer and part of it goes into a cash-value pocket and the other goes to fund your plan.
The two upsides with whole life is that it does act as a pseudo savings account that grows with some interest. You can use this cash value to borrow against the policy, or if you decide to quit paying premiums down the line you can take it fully and then pay taxes on it.
The other bonus is that a permanent policy will last your entire lifetime.
How useful would a permanent policy be for me?
Unless you’re in a time of your life where you have exhausted other investment options, choosing to spend a lot of money on a this type of life insurance would not be my suggestion.
On average your permanent policy will cost four times the amount of a term life monthly premium!
Here are some reasons why choosing a permanent life insurance policy would not be useful.
Reason 1: There are better options
Term life insurance, for the majority of Americans, will be the better option when choosing life insurance. Especially if it’s your first time buying a plan, or even if you’re looking to add a second plan.
You can also have several term life policies stacked along the way and still pay less than what you would for a whole life policy when you started out.
These plans are also more efficient for major debts you want to cover as you go through life. Your first term policy should always cover the mortgage and any student loans, or credit card debt that you want covered so your spouse isn’t saddled with major debt should you pass away at an early age.
Your second term policy should be bought when you have kids and need to cover college expenses and income that you make.
Reason 2: Cost Difference
Since the life insurance carrier is taking on the risk of covering you for your entire life, you should expect to pay a high premium for permanent life insurance coverage.
For this reason if you are just starting to look into life insurance it makes more sense to get a term policy and either invest the difference in a savings or Roth IRA, or use the difference to pay down debt.
Reason 3: Long Term Investment might not show
Some people use a permanent life insurance policy as an investment vehicle to pay for a major purchase down the road. But what they might not realize is when it comes time to cash out of the policy there may not be as much liquidity as they originally thought.
First you’ll have to account for the taxes you’ll owe if you cash out of the policy. Secondly, there might be fees you’ll have to pay if you cash out early on.
There also could be an issue with you being able to continue to pay the premiums, forcing the policy to lapse which leaves you with minimal cash value and spending way more than you intended.
Don’t rely on what an insurance agent might tell you about the returns on permanent life insurance. Do your homework to really find out if you can keep up with the payments long enough to see some value at the end.
For Some a Permanent Policy is Useful
We’ve given you some ideas on why for 90% of people permanent life insurance is not a route you should take.
But there are instances where someone should be advised to purchase a permanent life policy, and their situation fits perfectly with the advantages a whole life policy has.
Here are some instances:
Why Would You Need a Permanent Life Insurance Policy?
There’s a family reason that dictates you needing a policy to last more than 30 years. Your spouse might not ever work so she’ll always need some sort of protection. If either one of you have a health issue that would make getting a term policy more expensive due to a poor class rating, then you’d look at a small guaranteed issue permanent policy.
You might also be the type of person who feels better every night with the knowledge that you are protected no matter what happens and that your coverage lasts for life.
The last reason on why a permanent plan best fits your financial strategy is if you know that you would spend the difference between a permanent rate vs a term rate. Like we’ve said before a good strategy is to buy a term plan and invest the difference. However, most people don’t have the discipline to make that decision. A permanent plan takes that decision out of your hands.
In the end, it is you who has to spend the money on the policy, not the insurance agent. Please take time do research every situation before you are sold the wrong policy.