The Advantage of Term Insurance
The Difference in Opportunity Cost
It is difficult to fault anybody for wanting to leave a legacy for their family once they pass on. For this reason, opting for permanent insurance over the inexpensive alternative of term insurance is understandable. As long as you pay your premiums, you know what your family will be left with regardless of when, where, how, or why they will be left without you.
Term insurance doesn’t come with those same guarantees. In the majority of cases, premiums will be paid for the initial period and then will be allowed to lapse once expenses start to raise. This is why most term insurance policies don’t pay out and one of the reasons insurance is such a profitable business. If your main focus is having a payout at the end, term insurance is not the answer for you but there is a way you can implement it.
The Way to Use Term Insurance
Opting for term insurance over permanent insurance does make sense for people in the right frame of mind. For example, if you are less worried about leaving something behind at your death and more concerned about supporting your children until they reach an age of independence, term insurance can be a perfect solution. You can set a term for the insurance to be in place until your children reach an age to care for themselves and the allow the policy to lapse.
If your child is three and you want to make sure that you can provide for them through their years in college whether you are around or not, a 20-year term policy will be the most cost effective way to make sure that happens. With the money you save by using term instead of permanent, you can invest where you will get a greater return. While a permanent policy will have growth in its cash value through dividends and premium contributions, it cannot be expected to generate the kind of returns a proper investment vehicle could.
The Difference in Growth
With an online policy quote generator, we put in the information for a healthy 30-year-old male and searched for a policy providing $500,000 of coverage. The generator provided quotes for term policies from a number of companies that had monthly premiums ranging from $20 to $35. The same generator provided with the same information gave quotes with a monthly premium above $400 for a permanent policy.
By taking the term policy and investing the remaining $365 each month over the course of those 20 years, if that account experienced seven percent compounding growth, it would grow to $191,612.37. At that point, even if you were to stop contributions to this account and continue to let it grow for 20 more years, it would grow above $700,000. With more contribution or a better return, this could easily grow over $1,000,000 in that time.
Splitting the Difference
If you still have interest in having permanent insurance to ensure you leave something behind and have a bucket of safe money growing, you could split your insurance need between the two different kinds of life insurance. If you needed $500,000, you could get $150,000 in permanent insurance and $350,000 in term. The total premium would still be significantly lower than if you got only permanent insurance.
Both permanent insurance and term have their advantages and the decision comes down to preferences and need. When you consider how much and what kind of insurance you need, you should consider multiple factors. Think about your income, who it supports, and how much of that income you would want to have replaced for those individuals if something were to happen to you. Also, decide how long they would need that income for. Does it need to continue for the rest of their lives? Talk to these individuals so you can begin to get a clear picture of what the need would be. Then, you can begin thinking about how to fill that need.