The relative virtues of term and permanent life insurance are a matter of constant debate in the financial industry. Whole life, variable life and universal life policies can be used creatively to meet many financial needs, building cash values that can become a significant asset. Term insurance is less complicated, providing basic low-cost insurance coverage with no frills. Term coverage doesn't typically have a surrender value, though with some policies you can at least recover your premiums.
Term vs. Permanent Insurance
Term and permanent life insurance represent two distinctly different philosophies. Permanent policies provide coverage for the owner's entire life, at a level cost that's higher than term for young people but lower in the later years. They also invest part of the premium, creating cash values that can be treated as an investment or used to eventually pay off the policy. Term insurance, as the name indicates, provides coverage for a set number of years. It's very inexpensive for young buyers, but becomes prohibitive for older customers. Premiums cover the cost of insurance only and don't go toward creating cash values.
Invest the Difference
Either a whole life or term policy will pay a lump sum if you die while the policy is in force. Term life makes it possible to buy more coverage for less money in your younger years, when you're likely to have young dependents and fewer assets. The traditional advice is to do that, and invest the money you've saved on your insurance. Permanent insurance can take years to build cash values, and it's possible to grow your money faster though mutual funds or other conventional investments.
Return of Premium
Insurance agents often liken the difference between term and permanent insurance to the difference between renting and owning. When you buy a home or a permanent insurance policy, you're paying more but eventually own a tangible asset. With renting or term coverage, your money is gone. Some insurance companies offer an option called "return of premium" to counter that argument. If you take that option, you pay higher premiums for your coverage. If you're still alive when the term expires, you can get back your money from the company. It's not at all the same as having cash values to use or borrow from, but for some buyers it's worth the extra premium.
Picking and Choosing
Deciding which life insurance product best fits your needs takes some work. For a young person with large needs, a straightforward term policy might be the only way to buy enough coverage. Even the extra for return of premium might not be manageable. For high net worth investors, permanent insurance products offer several creative ways to invest money for tax-sheltered growth and estate planning. There aren't any hard and fast rules to help you choose between products, so it's important to understand your own goals and needs clearly.
Fred Decker is a trained chef and certified food-safety trainer. Decker wrote for the Saint John, New Brunswick Telegraph-Journal, and has been published in Canada's Hospitality and Foodservice magazine. He's held positions selling computers, insurance and mutual funds, and was educated at Memorial University of Newfoundland and the Northern Alberta Institute of Technology.