Ever since the idea of term life insurance came to the mind of man term life insurance vs permanent has been the center of active and thought provoking debate. Term insurance is without question cheaper than permanent life insurance but when compared with the value built into the latter people have varying ideas as to which is best. What about the cash values and dividends you get from permanent policies? Do you just ignore these? How can cash values and dividends be used to offset cost? Questions worth answering aren't they?
The ever constant innovation of life insurance policies make it more and more difficult to come to a consensus. Term life insurance vs permanent will continue to provoke the thoughts of anyone considering a life insurance purchase. Because term is simplest I will discuss that one first then I will get to the complexities of permanent life insurance and it's varying alternatives.
The Advantages Of Term Life Insurance
What life insurance companies have attempted to do with term life insurance, and have been fairly successful at doing it, is to strip the life insurance policy of as much of the front end load as possible. They have been more successful in doing this with some policies than with others. Let us take the increasing premium term policy for example. The lower premiums in the younger years result from the fact that the applicant is less likely to die within a given period, the term period, than an older person. Term life insurance is life insurance in it's simplest form taking into consideration mortality based on actual experience.
If we were to examine a decreasing term life insurance policy the decreasing annual premium reflects the decrease in the death benefit each year, also bearing in mind the fact that the insured is getting older each year. People like the way this is done because they believe that at no time they are paying more than for the term life insurance they actually want.
Advantages Of Whole Life Insurance
Comparing term life insurance vs permanent we notice that the whole life insurance premium is loaded up front. The life insurance company take most of the cost to issue a whole life policy in the first few years. There are clerical costs, medical costs if the policy is large enough or if they are dealing with an impaired risk, and of course agents commissions etc. If the costs are less than anticipated, and they usually are, they return that portion of unused premium. This is called a cash value. This cash value earn dividends which, if left with the company, accumulate interest. There are alternate dividend options that you may elect.
If you were to deduct the cash value of a life insurance policy plus the dividend after 20 years from the amount you paid in premiums you would see that the policy cost nothing over that period. But, hold on. We have to consider what those dollars, over and above the cost of term life insurance, would have been doing had they not been in the whole life policy. What rate of interest would be available.
The advocates of buying term when examining term life insurance vs permanent contend that the money would be earning the maximum over that 20 year period. On the other hand, the advocates for permanent life insurance assume that the extra premium would not be saved or invested. There is truth in both arguments but, because each person is different, we cannot come to a definite conclusion as to which is best. If you can afford to buy any policy you choose , do your comparisons for yourself and go with your gut.