Term vs. Permanent Life Insurance

Any time I talk with a client for the first time, we typically discuss the available types of life insurance in order to help them determine which is the most appropriate for them. Life insurance can be complicated but the selection comes down to temporary life insurance, or permanent life insurance. Every financial decision including life insurance selection involves trade-offs. In fact this is really the basis behind financial planning in general. You buy term insurance, it’s cheap and puts your mind at ease for a decade or two. You buy permanent insurance it’s not as cheap, but it becomes a valuable financial asset for your family, and your legacy.

I can have two conversations about this in the same day. Client A will say things like “why would anyone buy permanent life insurance it is so expensive?” Client B on the other hand might ask “Why would anyone buy term insurance? When I outlive the policy, won’t I have just thrown away years of life insurance premiums?”

Of course the decision involves many factors. People don’t have endless resources (back to the trade-off). Before you can start to explore the idea of using life insurance as a financial asset, or for legacy planning you have to cover the basics. Term insurance does that. It allows clients to protect their families against a premature death during working years, for pennies on the dollar. Most people outlive their term insurance, but when they don’t (yes this happens every day), their loved ones end up with one less worry.

When it comes down to it, permanent life insurance actually is a good investment for healthy people. When structured properly it becomes a stable and predictable financial asset with a good IRR (Internal Rate of Return). This return is enhanced by the fact that the death benefit is not subject to federal income tax.