Perspectives on the Term versus Permanent Life Argument

Written by: Lee Sherman

When it comes time to purchase life insurance, you have two options, each with pros & cons. Permanent life insurance is just like it sounds, a policy that lasts your entire lifetime so long as you continue to pay your premiums, while term insurance lasts for a set period that you determine when you buy the policy.

Cash on hand

Benefits are paid immediately upon the policyholder’s death with permanent life insurance. What you may not expect from permanent life insurance is that it can act as an investment account, providing financial benefits long before you leave this mortal coil. When you pay your premiums, a portion of the money gets deposited in a cash value account that grows at a rate specified by the policy. Once it reaches a specific size (also according to the policy), you can borrow money from it at competitive rates. Because the insurer holds the money to cover the loan, there is no need for a credit check, and there are no time limits on the loan. If you have what’s called a universal life insurance policy, you may even be able to pay your premiums with the cash in your account so long as its cash value is more than zero. Should you decide to drop your coverage, you can get most of your money back, subject to surrender charges during the first few years of coverage. What’s even more amazing is that some policies will allow you to receive dividends, just as you would with a stock. Dividends can be taken as cash, used to pay premiums, or used to pay for additional coverage.

What could go wrong

There are some significant downsides. You can lose your coverage entirely if the loan plus unpaid interest is more than the cash value, defeating the purpose of having life insurance. And here’s the worst part. Because the cash value is separate from the death benefit, your beneficiaries won’t see a single dollar of your hard-earned savings when you die. The insurance company keeps it. If that sounds like a bad investment, you’re right.

Term life insurance is different because, generally speaking, you get what you pay for. It doesn’t masquerade as an investment vehicle. It is simply there to pay the agreed-upon lump sum when you die. Term life is much more affordable than permanent life insurance because it lacks the cash component. It only has value once the policyholder dies.

In summary, permanent life insurance is far more expensive than term life, it probably isn’t the best way to grow your wealth, and you may be building up a massive pool of cash only to see it go up in smoke if you die before you cash it out. It’s a good deal for the insurance company, not for you. Most financial advisors would advise you to keep insurance separate from growth.

Related: Unique “Open Architecture” Wealth Management Options Using PPLI

Lee Sherman contributes to MyPerfectFinancialAdvisor, the premier matchmaker between investors and advisors. Lee is an experienced journalist and editor with over 30 years of expertise with a significant history of writing in the personal finance and technology arenas.