What’s the Right Type of Insurance Policy: Term, Perm or None?

At Vector Wealth Management we realize that true wealth management cannot only be around asset management. The complexities of tax and estate laws are great and consistently changing. These changes have a trickle effect on other decisions, such as the purchase of life insurance. Perhaps too often insurance is “sold” not purchased. This distinction is important because without proper evaluation the wrong (or too expensive of a) product might be used. Even further, insurance might not be necessary. For these reasons, when making a decision about life insurance, the first question to answer is: “what’s the purpose?”

Many people looking for life insurance are trying to protect their family from hardship or to ensure a specific financial goal is met. Life insurance is commonly used to provide funds to replace a lost income stream, a pay off a mortgage, fund college, or ensure a successful retirement for a spouse. Less frequently, due to tax law changes, insurance is a way to pay potential estate (death) taxes.

Once you have determined the purpose (or purposes), the next step is to calculate the amount.

If you’re trying to pay off a mortgage or provide a specific amount for college, the calculation will likely be pretty straightforward; but if you’re looking to replace income or protect your spouse’s retirement you should seek the expertise of a product-neutral financial advisor to help you determine the amount of coverage.

For many, the most difficult part of buying life insurance is deciding what type of policy – term vs perm.

Term insurance provides a set amount of coverage for a specific amount of time. Sometimes this is referred to as ‘use it or lose it’ because there is no residual value once the policy coverage is over. Permanent insurance combines the protection of a term policy with the ability to use it as an investment tool. On the surface that sounds great. However, there is a wide range of permanent insurance products and many of them have high fees and limited investment choices. In some limited situations, permanent insurance might make sense as an investment vehicle. However, in most common circumstances, term insurance is the better choice.

In the end, if you find yourself torn between term and perm – consider a bit of each or use a convertible term policy (term that can be converted to permanent if specific guidelines are met). If you are interested in maintaining a cost-efficient policy in the short term, but want the ability to convert the policy to permanent insurance down the road, this option may be the best fit for you.

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