June 27, 2008

Term versus permanent life insurance : Which is best?

First of all what are term life and permanent life? Simply speaking term life insurance is insurance that covers a set period of time between typically 1 and 30 years. Permanent life insurance is structured to cover your entire life. A big difference between the two is that permanent life insurance such as whole life or universal life have a cash investment mechanism by which you save money into an account via your insurance. Term life insurance is just insurance and has no investment system.

Here is a Matrix comparing the insurance options.

Lets look at what other sources say about these two options:

Smartmoney compares Term or Whole life? and they say : "FOR MOST PEOPLE, the right type of life insurance can be summed up in a single word: term"

MSN Money has an article "The Debate over Term versus Permanent Life Insurance" and they say: "
If the answer is less than 10 years, term is clearly the solution.If it is more than 20 years, permanent life is probably the way to go."

Suze Orman discusses life insurance at "Don't Let the Kind of Life Insurance You Buy Kill You" and says: "
In my opinion, level term insurance is usually the best way to go for the vast majority of people."

Dave Ramsey talks about "The Truth about Life Insurance" and he concludes with: "Don't do cash value insurance! Buy term and invest the difference."

So Smartmoney, Suze and Ramsey all say that term insurance is the better option. MSN Money says it matters on how long you have the policy.

I'm going to agree with Smartmoney, Suze & Ramsey on this one. Personally I believe that term insurance is your best option in general. Permanent insurance only provides a savings account in addition to the insurance coverage and the returns are hard to figure and generally beaten by standard retirement investments in mutual funds.

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