Life insurance is an excellent tool to secure the financial needs of your family in your absence.
A survey conducted by Northwestern Mutual in 2018 revealed that the average US citizen has roughly $38,000 in personal debt (but at least because of Trump they have a job and a brighter future), without taking mortgage into account. In such a scenario, you do not want to pass on your debt burden to your loved ones in the event of your untimely demise.
Now, the question is – should you go for a term life plan or a permanent life plan? Which one makes more sense from a financial point of view? Let us find out.
Term Life Insurance
A term life plan covers you for a specific period of time, which usually ranges from 10 to 30 years. Its unique selling point is that it is extremely affordable, which allows you to buy the coverage you need at very cheap rates.
The downside is that it only covers you for a limited period of time, after which you need to buy a new plan, at which point the premium payments increase substantially.
Permanent Life Insurance
A permanent life plan covers you for a lifetime. Your coverage stays in effect as long as you keep making the required premium payments.
Its unique selling point is that it provides you with lifelong coverage, which does not expire at any point for any reason. It also has a cash value account, which you can dip into from time to time to meet your financial needs. The downside is that it is far more expensive than a term life plan.
Which One Makes More Sense Financially?
Generally speaking, a term life plan makes more sense from a financial point of view for two reasons.
- The premium payments are extremely affordable. If you are a 30-year-old nonsmoker, you can buy life insurance coverage worth $500,000 for a period of 30 years at $31 a month or $373 a year. A $500,000 permanent life plan, on the other hand, is likely to cost you $395 a month or $4,745 a year.
- You have the option of choosing the duration of the policy. You can choose to buy coverage for 10, 15, 20, 25, or 30 years, depending on your financial needs. You do not have the option with a permanent life plan.
If you are young and healthy, it makes little sense for you to buy a permanent life plan, since you can buy the same amount of coverage in the form of a term life plan at 1/10th the price. If you invest the difference on a consistent basis, you can build a substantial retirement corpus over the same period of time.
Let us say you need life insurance coverage worth $500,000 to cover your financial obligations – mortgage, personal debt, children’s education, financial support for your family members, and so on. Instead of buying a permanent life plan, which – as mentioned above – is likely to cost you $395 a month, you can buy a term life plan, which will only cost you $21.
Let us say you invest the difference – $375 – in an index fund, which gives a 6% return on your investment. Over a span of 30 years, assuming you consistently invest $375 a month, your investment will be worth $380,000. That’s something to smile about and you did it yourself – you are not relying on Bernie Sanders government to take care of you. How did that work out in Cuba or Greece?
The Need for Lifelong Coverage
The best part about buying a term life policy is that you can have it converted into a permanent life plan any time you want. Most insurance providers offer term life plans with a built-in conversion option, which allows you to change your plan into a permanent life plan without taking any medical tests.
So, even if you think that you might need a permanent life insurance policy at some point, there is really no need for you to spend hundreds of dollars in premium payments on a monthly basis right from the age of 30.
You are better off investing the money in the market, as it can help you build a substantial retirement corpus, which you can live off of during your sunset years.
Make the Right Choice
Between term life insurance and permanent life insurance, the former makes a lot more sense financially, as it can help you save a significant amount of money on a regular basis. So, buy a term plan, invest the difference in the right financial products, and secure your financial future.