Term Life Insurance & Invest the Rest

There is always some curiosity involved when buying life insurance. There are people on either side of the whether to buy term life insurance and invest the rest or buy permanent insurance with cash value. In my opinion, the majority of situations suit buying term insurance rather than permanent insurance policies, such as whole life, universal life, variable universal life, etc.

What is the main reason to buy life insurance? When you buy life insurance for yourself, it is to provide a benefit to someone you care about in case something happens to you. At certain periods of your life do you really need life insurance? In most cases it is when you have dependent children (minors) or a dependent significant other. So if something does happen, little Timmy and Susie’s college will still be paid for, your debts can be cleared away, including your auto, credit, and home loans, and it will give your significant other a period to grieve without feeling a huge financial burden.

Term life insurance is cost effective because there is no cash value attached to it unlike permanent life insurance policies. Also, term insurance expires after a certain number of years, hence the word "term" in term insurance.

When you buy a 20-year term insurance policy, after twenty years your insurance coverage will expire. However, with permanent policies, you can have continued coverage for life as long as you make your premium payments but if you stop making payments, you better hope that there is enough money in the cash value portion of your policy to cover your premiums for the rest of your life.

When seeking the amount needed, consider these factors:

• Short-term debt
• Long-term debt
• Auto loan
• Home loans
• Credit card debt
• Other financial obligations
• Cost of college and student loans for any children

Term Insurance and Invest the Rest

Buying term life insurance and investing the difference is a notion of buying a term policy with a lower monthly premium than a monthly premium for a permanent policy. The money you save with a term policy on a monthly basis due to the lower monthly premium can be invested by you overtime. Let us use an example:

A term life insurance policy appears to be the better choice compared to a universal life insurance policy, which may have less cash value due to the higher cost of insurance and an interest on the cash value of around 3 percent. With term life insurance, your annual investment would be worth $25,267.29 after 20 years. Of course that assumes an annual rate of return of 8.0% and all of your annual investments happen at the beginning of the year.

Term Insurance is a much better option for most people. Permanent insurance might be an option for high net worth individuals, especially for estate planning purposes. However, estate planning is far too complex to be covered in this article and must be done in consultation with an expert advisor.

So it seems, that term insurance compared to permanent insurance is simple and not complicated with no cash value to worry about. You can invest the difference in various investment options from stocks, mutual funds, to CDs, etc. And most importantly it is competitively priced.