Is term insurance the best way to buy life insurance?
Your choice of life insurance depends on how much
coverage you need, how much premium you can afford and whether you
want life insurance only for its death benefit or also for its
savings potential. Term insurance pays off only if you die;
cash-value insurance combines a death benefit and an investment fund.
For short-term protection, from one to 10 years, buy term insurance.
It will give you the most protection for the least money. Term
coverage starts with low premiums, which are either adjusted annually
or can be locked in for periods of 10, 15 or 20 years. The longer the
lock, the higher the premium. Permanent insurance, by contrast, lets
you lock in one premium rate for your lifetime. Whole life, the most
widely known type of permanent life insurance, gets its name from
that fact, although it is also true for other permanent policies.
Part of your premiums are invested and build up a cash reserve with
tax-deferred earnings you can draw from. However, cash-value premiums
are much higher than term premiums. Many people believe that the best
approach is to buy the cheapest term policy you can find and invest
the difference between the term premium and cash-value policy premium
in stocks, bonds or mutual funds. This strategy could work well if
you have the discipline to stick with a savings program and the
market performs as it has in the past. By the time you retire, you
would have had the insurance protection you needed at a low price
without the high commissions associated with cash-value insurance.
And you will have built a sizeable investment portfolio.Such an
important decision, however, should be undertaken only after a
complete analysis of the potential results that includes a
consideration of taxes and possible down markets. Nothing is as
simple as "buy term and invest the difference" purports to be.