Life Insurance: What to Buy
September 13, 2007 by TFBMy last post about life insurance was on how to buy life insurance. This time I’m going to talk about what to buy.
1. Permanent vs. Term. The best approach on the permanent aka cash value vs. term discussion is tuning out. Just buy term. Very few people have permanent need for life insurance. The vast majority of people are better off buying term. So don’t even worry about the other kinds of life insurance. Some agents and web sites will try to steer you into permanent insurance. They put up all kinds of false arguments like “permanent is like owning; term is like renting.” Just ignore them. For entertainment value or if you’d like immunize yourself from the false arguments, you can see how an insurance salesperson twisted the logic and how the members on the Bogleheads forum rebutted.
2. Level Premium Term or Annually Renewable Term. Level Premium Term guarantees fixed premium for the entire term. You pick how many years you want to insure for. The premium stays the same throughout the entire term. Because the odds of a person dying increases with age, the cost of insurance also increases with age. So while your premium stays the same, you will be paying more than the cost in the earlier years and less than the cost in the later years. Annually Renewable Term is pay as you go. Your premium is lower in the earlier years and higher in the later years. See sample premiums for a $500,000 policy for a 35-year old in the chart below:
I chose Level Premium Term for myself because I like the certainty of knowing my premium won’t change. I also think it’s more economical. More companies offer Level Premium Term than Annually Renewable Term. More competition drives down the cost.
3. For how long? With Level Premium Term, you choose a number of years you’d like to have the premium fixed. The longer the period, the higher the premium because the higher cost of insurance for the later years has to be averaged out to the earlier years. People usually choose to buy coverage through the year when their kids are out of college, when their mortgage is paid off, or when they retire. I chose 15 years for myself. That’s when my mortgage will be paid off.
With annually renewable term, you don’t have to pick a specific term up front. When you don’t need insurance any more, just stop paying.
4. For how much? This will involve a bit of math. This post is already getting long. I will cover it in the next post. Stay tuned.
[Update on 9/19/2007] This is the 2nd post in a mini series on life insurance. Other posts in this series are:
- How to Buy Life Insurance
- Life Insurance: How Much Should You Buy
- Research Life Insurance Company Ratings
- Life Insurance: How Much Should You Buy
- Open Enrollment, Part 2: Life Insurance and AD&D
- Research Life Insurance Company Ratings
Thanks for the article. I think that each choice basically comes down to the situation of the individual. A. one might want to budget and with term life insurance you are set to know what you are are paying on your premium each year. In other words it doesnt change. With whole, you are basically setting a investment in something that will change in value and will change in what you pay.
A really good article. I agree about buying term vs permanent. I was just about sold permanent back around age 28 and even today at 56 the payment was MORE!!! And I can see the need for coverage mostly disappearing in the next 5-10 years. Long before it would have made a difference.