I am 32 (married, 1 daughter) and am looking to have about 700,000 in life insurance. I can get most of this insurance in a 30 yr Term Insurance at a good rate. My question is: within 30 yrs, my kids will have finished college and moved out. If so, would my Term Insurance suffice or should I look at getting some Permanent Life Insurance? Why would I need permanent life insurance? I read on the internet that Permanent Life Insurance is used for burial costs and to pass money on to my heirs. What if I can accomplish both of those through just my personal finances?
So my question is: why would one ever consider permanent life insurance
So my question is: why would one ever consider permanent life insurance
mbrcatz 5:07 pm on April 3, 2010
What’s the GOAL of the insurance?
Rather than backing into "why should I buy permanent coverage", you need to set the goal FIRST. What do you want the insurance to DO?
If you buy term and invest the difference, you can STILL pay for burial costs and pass money to your heirs – a LOT MORE money, than through permanent insurance, if you plan properly.
So. What is permanent life insurance good for? Evading estate taxes, if you have a very large estate. You can pass money along without paying half to the government, if you pass it through life insurance. Or, to PAY estate taxes, if you own a business – like a family farm – that is WORTH a lot of money (subject to estate taxes!) but can’t come up with that, when you die and pass it to your heirs.
Yes. There are goals that permanent insurance fills better than term. But for MOST people, buy term invest the difference is the better way to go.
Tweeter & the MonkeyMan 5:07 pm on April 3, 2010
The most common answer I know is "only if you have no self control".
Financial guru Suze Ormond frequently discusses this on her TV show and website. The basic argument is:
For ‘whole life’ insurance, you pay premiums that are both for insurance, and accumulating cash value. At the end of the contract (which can be based on time, interest rates, and other stuff), your policy is worth just about what you paid into it, assuming you never collected.
For ‘term life’, you pay about 1/2 or less on your premiums.
Ideally, you could take the other half of the money you might spend, and invest that money into something safe like Savings bonds or Certificates of Deposit.
During the life of the policy, if you collect at any time – both policies pay the same amount. You’ve paid a lot less for the term life.
If you don’t collect ( thankfully) , then -in most cases- your accumulated savings with compounded interest should be equal or greater than what the whole life policy will return to you (surrender value).
Now, if you run into financial trouble – having a smaller payment may work out for you. But, the temptation is to spend that ‘extra’ money.
If you are sure you can commit to saving the difference, then investing that money yourself is almost a no-brainer. If you think you might give in to temptation (or if someone else’s money is paying the bill) – then you might decide to allow the whole life insurer ‘hold’ that money for you – as kind of a forced savings.
Finance1o1.blogspot.com ® 5:07 pm on April 3, 2010
The reason why anyone would own permanent life insurance is because they are sold on it without really knowning how their life insurance works. Agents sell permanent life insurance as a great way to save your money and achieve your long term goals. The real fact is that its the worst way to build savings and it will never be able to achieve your long term goals. When the client receives the life policy, majority of them never reads it and believes everything that the agent said.
If you own term and invest into mutual funds over the next 30 years, you can have a sizeable wealth of income. I personally own a 20 year term insurance and invest $400/month in mutual funds that are inside a Roth IRA. That means my investments grow tax-deferred and by the time I reach age 59 1/2, I can withdraw all my money without paying any taxes on it. By the end of the 20 years, I will be only 43 years old. I will have no debts or any financial obligations, so I will have no need for term insurance. If my investments has an average return of 12%, which is possible because I seen many mutual funds that has average that in the past 20 years, I would have about $400k saved. But I would be 43 and have at least another 17 years to retire. So in the 37 years I’m investing, I’m expected to have at around $3.3 million saved by the time I’m 60 years old.
Even if those figures were half true, then I would have at least $1.5 million. Do you think I still need life insurance at age 60 when I have no debts, no kids to take care of, and the only financial responsibility I have is myself? I think I will do pretty well with my finances without the need of having permanent life insurance.
Kevin C 5:07 pm on April 3, 2010
Your thinking is right. Get a 20-30 year term policy. Invest the difference between what you spend on the term policy and what you would have spent on the whole life policy. You will end up much better off.