One of the speedbumps people experience when they invest in a life insurance policy is figuring out what type of life insurance they need. Everyone has a unique personal and financial situation. It only makes sense that all people shouldn’t be purchasing the same kind of life insurance policy.
Many people prefer term life insurance, as it’s cheaper and provides a good amount of coverage. Others prefer the concept of permanent life insurance, as they believe their dependents will be all set financially after they pass away. Each policy has its own flaws, but the one red flag that many insurance buyers overlook involves permanent life insurance, the more expensive option, though it seems better on paper.
Receiving lifelong protection sounds like a great deal; it seems like you’re setting your family up for when your final day comes. However, it’s not quite that simple. Permanent life insurance isn’t for everyone. In fact, while most people overpay for their permanent life insurance policy, many of them don’t receive a payout at their deaths. Without a payout, all that hard-earned money would go right to their life insurance company, resulting in a profit for them and absolutely nothing for your family.
Permanent Life Insurance
With permanent life insurance, you pay an annual premium until you die. When you eventually pass on, your beneficiaries will collect a payout on this policy. As the name suggests, permanent life insurance lasts for life, as long as you’re making your payments on time. One feature that permanent life insurance includes that term life insurance does not is a cash-value investment. However, for many customers, the cash-value component of their permanent life insurance policies has turned out to offer poor investment returns. There are a few different variations on permanent life insurance, each with different specifications and benefits.
Term Life Insurance
A term life insurance policy is the type of policy that lasts for a set period of time. When purchasing term life insurance, people can choose how long they want their term life insurance to last; the most popular coverage periods are 10 years, 20 years, and 30 years. The most common investors in term life insurance are adults with growing families; with a set period of coverage, this ensures that their children and/or spouse will be protected in case of disaster. Though term life insurance doesn’t have a cash-value benefit, its main perk is its affordable price.
The Problem with Permanent Life Insurance
The most negative component of permanent life insurance is the high cost of premiums. In fact, so many people fall behind on their payments – even allowing their policies to lapse – that a majority of universal life insurance policies do not result in a payout following the policyholder’s death. If someone experiences a period of financial difficulty or unemployment, he or she might fall behind on making the premium deadlines, resulting in a lapse. If someone falls behind on payments or is in the middle of a lapse when he or she passes away, the paid premiums would go right to the insurance company as a profit for them; nothing would go to the family or loved ones of the deceased.
What Should You Do?
In most cases, the best policy is a term life insurance plan. Not only is it cheap and offers adequate protection, you’ll be less likely to allow your policy to lapse. The only times it makes more sense to buy permanent life insurance is when you’ve maxed out your 401(k) and Roth IRA, when you know for certain that you won’t allow the policy to lapse, and when you are looking for a way around an estate tax – which mostly high-income households have to deal with in the first place. If you already have a permanent life insurance policy and feel that a lapse is in your near or late future, you might want to reevaluate your policy, looking instead toward a term life insurance plan. Surrendering your policy for a cash value or through a life settlement might be a smart way to make sure you don’t experience a lapse and, as a result, do not lose your hard-earned investment.