New Jersey Entrepreneur

There are many reasons why nearly 60 percent of Americans don’t own individual life insurance. One obvious reason is that people generally don’t like to think about their own mortality. Another is that some simply don’t understand it. In fact, according to LIMRA, the insurance industry’s research association, between 30 and 40% of Americans find it difficult to determine how much or what kind of life insurance to buy.¹

While there may be legitimate reasons for delaying the decision to buy life insurance, the consequence of a death occurring first can be devastating to those who depend on you financially. When it comes to life insurance planning, one thing is clear: owning the right amount of insurance is critical. But, not all insurance is the same, and the type of insurance you own can play a key role in helping you achieve your and your family’s financial goals.

Some financial "experts" say term insurance is the only way to go while others will tell you permanent or "cash value" is best. As with most things in life, there is no one-and-only answer for everyone. The best solution must be based on a person’s unique set of needs, circumstances and goals and may even include a combination of different products.

Renting vs. Owning

The decision to buy term, permanent or a combination of the two is analogous to owning or renting a home. The decision should be based on the needs you have, how long such a need will last and how much you can afford.

"Renting" temporary protection with term insurance

Just as you wouldn’t buy a home in Hawaii simply to have a place to stay in while you vacation there for two weeks, you shouldn’t buy a permanent policy if you only plan to keep it for a short time. Since term insurance lasts only for a limited number of years before it expires, it is usually best suited for those with short term or temporary needs that will disappear in time, such as a covering a mortgage or other debt. Because of the lower initial premiums of term, it may also be the only affordable way for those who need a large amount of coverage to get the right amount of insurance today.

Sometimes called "pure insurance" protection, term is a no-frills kind of policy. Here are some of its distinguishing characteristics:

• Annual premium may increase every year.
• Increasing availability of "level term" premiums that start off higher but stay level for 10 or 20 years, for example.
• Most can be converted to a permanent policy within a specified number of years, or before a certain age, even if insured’s health worsens.
• Coverage will end most commonly by age 75 or 80 or after a specified period of time such as 20 years.
• No cash value

"Owning" permanent insurance for a lifetime

While the reasons people have life insurance change throughout their life, many find they continue to have a need for it until the day they die, whenever that is. Since term policies usually end before the average healthy person will reach their life expectancy – which today is in the mid 80’s2 – a permanent policy is more appropriate for those with long term needs. Not only does the insurance protection from a permanent policy last as long the insured does, it can be more cost effective than paying many years of premiums on a term policy. This is especially true if there is an insurance need later in life.

Initially, the level premiums of a whole life policy will be higher than the premiums of a term policy with the same amount of coverage. However, because the premiums for an (annually renewable) term policy increase as the insured gets older, they will typically grow to exceed the permanent policy’s premium later on. The "extra" premium paid in the early years of a permanent policy helps build the policy’s cash value and offset the higher age-based costs later on. This fundamental difference is why the premiums for permanent insurance stay level.

For someone willing and able to commit to paying these relatively higher premiums on an ongoing basis, a permanent policy can provide a number of benefits:

• Life-long insurance protection
• Guaranteed level premiums, death benefit and cash value for life.
• Non-guaranteed dividends and/or cash value beyond the guaranteed values may be used to increase the policy’s face amount, taken as cash, or used to offset part of all of the premium payment.
• Cash values increase annually on a tax-deferred basis and can be accessed during the insured’s lifetime to help reach a number of financial goals, such as providing for a child’s education, boosting retirement income or having a financial emergency fund
• Option to elect a "paid-up" policy (with a reduced level of protection) which requires no further premium payments.
• Policy can be surrendered for its cash value (this may trigger an unfavorable tax consequence).

Cheapest isn’t always wisest .

Term insurance is an appropriate choice for many people. However, it should not be purchased based on cost alone or the blanket recommendation to "buy term and invest the difference." Following this advice usually leaves people vulnerable to a gap in their financial plans. In fact, according to a recent survey on financial behavior, people who bought term life insurance with the intention of investing the premium savings elsewhere, admit they are not following through. In fact, only 14% of those only owning term insurance invest all the money they saved.3

Life insurance can play a critical role in helping individuals, families and businesses reach their financial goals and dreams. No doubt, the decision of how much and what kind to buy can be difficult. Meeting with a qualified and experienced insurance professional can help answer any questions and remove any reasons for putting off such an important decision. Take the time to understand your options and make a decision. The cost of taking no action may be too much to bear for those who depend on you financially.