Life Insurance: What to Buy

September 13, 2007 by TFB

My 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:

Software picked, likely related posts:

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Comments

3 Comments on Life Insurance: What to Buy

Adam on September 30, 2008 | permalink

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.

Benefit Consultant "Gordon" on September 30, 2008 | permalink

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.

Jonathan on July 3, 2009 | permalink

[Note from Editor: Jonathan sells life insurance. See previous comment.]

have you looked at the price of term at the age you will be at the time your 20 or 30 yr term runs out? and will you be insurable at that point? maybee you wont need insurance at that point. most family less people wont have a beneficiary but most of us have kids we want to leave a lot of money to not just cover funeral expenses. also shouldnt we pay back the kids that are going to use their money to take care of us when we get to old. we are living longer about 20 years. I think that term is self ish how much can I save, how about your wife the person that wrote the article above pobabliy lives alone in a closet and doesnt care about his family or his future grand kids.

i hope he lives long but last week a good friend had a heart attack at 40 and died. what then? what about his kids all 4 of them ? wow he saved 20$ a month and didnt have any time to save anything. if you cant make time you better buy it.

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