Term Insurance

Why buy life insurance?

Many financial experts consider life insurance to be the cornerstone of sound financial planning. It is generally a cost-effective way to provide for your loved ones after you are gone. It can be an important tool in the following ways:

Income replacement

For most people, their key economic asset is their ability to earn a living. If you have dependents, then you need to consider what would happen to them if they no longer have your income to rely on. Proceeds from a life insurance policy can help supplement retirement income. This can be especially useful if the benefits of your surviving spouse or domestic partner will be reduced after your death.

Pay outstanding debts and long-term obligations

Consider life insurance so that your loved ones have the money to offset burial costs, credit card debts and medical expenses not covered by health insurance. In addition, life insurance can be used to pay off the mortgage, supplement retirement savings and help pay college tuition.

Estate planning

The proceeds of a life insurance policy can be structured to pay estate taxes so that your heirs will not have to liquidate other assets.

Term Life Insurance

Term life insurance provides a death benefit only if death occurs during the "term" or coverage period of the policy. If you outlive your term or quit paying premiums, your policy lapses and is of no value.

Term life insurance plays a vital role in proper financial planning. People who buy term may do so for several reasons such as:

Temporary need - They have a temporary need, which lends itself to a temporary solution, i.e., raising children, education, paying off a mortgage, a business buy/sell agreement.

Affordability - Term premiums are very affordable. If you're in excellent health, you can get a lot of coverage for very little cost.

The Gamble

95% of all term policies go unpaid. In other words, if you took a random sample of 100 people who purchased term insurance, 95 of them would outlive their terms. The insurance companies know this. That is how they can afford to offer a 45 year-old male $250,000 worth of coverage for a 20-year term for only $375 per year. They've crunched the numbers and are willing to bet that you and a whole lot of other people are going to outlive your policies. Because term is inexpensive, there is much less commitment. When you want out, you simply stop paying the premium; no surrender or tax hits to worry about.

Permanent Life Insurance

There are numerous types of permanent life insurance, but the most common are: whole life insurance, universal life insurance and variable life insurance. Permanent life insurance provides lifelong protection. As long as you pay the premiums, the death benefit will always be there. Furthermore, you never have to medically re-qualify for permanent insurance like you do when you renew term insurance.

Most permanent policies have a feature known as "cash value" or "cash surrender value."

There are a number of advantages to having this cash value build up. For example:

The cash value can be taken out either by withdrawing or borrowing. You may borrow from the insurance company, using the cash value in your life insurance as collateral. Unlike loans from most financial institutions, the loan is not dependent on credit checks or other restrictions. You ultimately must repay any loan with interest or the borrowed amount will be deducted from the death benefit, which goes to your beneficiaries. Because this method of withdrawal is considered a loan, it is an income tax-free transaction.

The cash value accumulates on a tax-deferred basis.

The cash value is a personal asset and is reflected on your balance sheet.

You may cancel or "surrender" the policy -- in total or in part -- and receive the cash value as a lump sum of money. If you surrender your policy in the early years, however, there may be little or no cash value.

If you need to stop paying premiums, you can use the cash value to continue your current insurance protection for a specified period of time or to provide a lesser amount of protection to cover you for as long as you live.

Term Advantages:

Cheap - "Buy a lot for a little" - Term can cost up to 5 times less than permanent insurance depending on your age and term length.

Low commitment - when you want out of term, you just simply stop paying the premium. Whereas with permanent you might incur surrender and tax penalties for withdrawing.

Disclosure - What you see is what you get. There are no hard to understand charges or expenses, you don't have to worry about your interest rate or market returns. With term, you simply pay the premiums and get the coverage.

Lots of options - you could take the savings from term and invest into any investment vehicle of your choice.

Term Disadvantages:

Outliving it - Hopefully you'll live a long prosperous life and never see a dime from your term policy.

No equity - With term you're just paying for coverage. Other than the coverage it provides, it really has no value.

Costly to renew - You should plan on not needing any insurance at age 70 plus, because term prices increase dramatically with age and deteriorating health status.

Clients seeking life insurance protection longer than 30 years then they should choose the permanent route. There is no telling what your health condition will be like when it comes time to renew your term policy.

Permanent Advantages

Tax Advantages - The cash value in permanent insurance accumulates tax deferred. Unlike a mutual fund, there are no distribution, dividend or capital gains tax due each year. To earn a net return on investments that do not share the tax advantage enjoyed by