When it comes to life insurance the first question after, “Do I need it?” is always “Do I purchase term or permanent?” Needless to say, I get asked both of these questions regularly. The first one I have no problem answering, but the second is always a little tougher. Not because I don’t understand the question, but because I honestly don’t have an opinion. Here’s why: the type of life insurance you purchase is always secondary to the face value you purchase. I don’t care what type you get, I care how much you get.
But while I don’t have a strong opinion either way, I do see a lot of the same situations, so here are a few thoughts on the differences.
First, permanent life insurance is more expensive. A lot of people are obsessed with the idea of getting permanent, then realize it’s more expensive than they can afford. But instead of jumping down to a term policy they can afford, they go ahead with permanent in a lower face value. If you need $500,000 in life insurance don’t go with $250,000 in permanent just because you like the idea better. The face value is what’s important.
Another common thing I see is people who buy short-term policies, say 10 years, just to cover them until their kid graduates from college. But at that time they realize they want to purchase another term for whatever reason. This is no problem except they are now 10 years older and likely less healthy, meaning their policy will be more expensive.
Lastly, I see a lot of people flake out on permanent policies. When this happens you’ve basically paid a very high premium for what amounts to temporary coverage. Weigh your options and needs and don’t get locked into a policy you can’t afford.
Let’s recap what we’ve covered:
- People are too hung up on which type to buy
- They should be more hung up on purchasing the correct face value (10x your income)
- When buying term, people often forget to think beyond current needs to future needs. You want life insurance to cover you while your kids are in the house, but don’t forget to consider if you want to leave something for your spouse after the kids are gone.
- Bailing on a permanent policy is usually preventable
Peter Dunn a.k.a. Pete the Planner® is an award-winning financial mind and a former comedian. He’s a USA TODAY columnist, author of ten books, and is the host of the popular radio show and podcast, The Pete the Planner Show. Pete is considered one of the foremost experts on financial wellness in the world, but he’s just as likely to talk your ear off about bass fishing.