#best life insurance
Insurance Agents Are Pushing Pricey ‘Permanent Life’ Aggressively. Here’s What You Need to Know
Term life provides a death benefit for a specific period, such as 10 to 20 years, and premiums are generally set at a flat rate; only a small percentage of policies sold to people in their 30s and 40s ever pay out. Permanent life is meant to be in place your entire life, paying out upon your death, whenever it is.
Until recently, permanent life was widely considered stodgy, needlessly complicated and a bad bargain to boot, what with its hefty agent commissions and other costs and the slow buildup of value in the savings account. The accumulation is so slow in part because commissions typically eat up the entire first-year premium, and then run about 5% a year for the next few years before dropping off.
All those caveats generally still apply, but sales have jumped as life insurers have done a good job promoting permanent life’s safety benefits and playing on consumers’ fears about the stock market.
Under the hottest-selling types of permanent life, the savings component is invested in bonds—which generally held up well during the market meltdown. Big sellers of permanent life such as Guardian Life Insurance Co. of America, Massachusetts Mutual Life Insurance Co. New York Life Insurance Co. Northwestern Mutual Life Insurance Co. and TIAA-CREF continued paying healthy dividends or interest to their policyholders, a feat some have noted in recent marketing campaigns.
But it isn’t fair to compare the stock-market crash with the performance of an investment based largely on bonds. An investor could have bought cheaper term insurance, plunked the rest into Treasury bonds, and done well during the financial crisis. The old argument for buying term insurance and investing the rest still applies, advisers say.
In short, term life remains the best choice for most people, says James Hunt, an actuary with the Consumer Federation of America, a nonprofit advocacy group based in Washington. It is the lowest-cost way to get the most coverage for a shorter period, and it is easy to walk away from a policy if you find a better deal or your needs change, he says.
Permanent-life policies, in contrast, generally need to be held for at least two decades for the savings component to beat a bond-based buy-term-and-invest-the-difference strategy. That’s because the savings account expands so slowly in many of the policies pitched to consumers—thanks largely to big upfront commissions.
Many buyers underestimate how difficult it can be to keep up with the high premiums, and end up walking away from a policy early. According to the Society of Actuaries, which studied data from the early 2000s, 26% of whole-life policies are terminated in the first three policy years and 45% in the first 10 years.
- Earnings build up tax-deferred. The higher the tax bracket, the more valuable the policy.
- Most policies are bond-based, which can help protect your portfolio from a stock-market tumble.