When it comes to houses, we all know the difference between renting and owning.
With renting, each month your landlord gets a rent check. You get to live on their property for a month. If you don’t pay you’re out! Lather, rinse, repeat.
Stay in the same place and you can count on one thing – your rent will go up.
If you stay for a long time, what do you get back? Absolutely nothing, unless your landlord is also your mother.
Term insurance is like renting a house.
You pay the insurance company a premium. They give you life insurance. Like a lease, the premium is fixed for a “term” such as five, ten or twenty years. Thus, “term” insurance.
What happens if you stop paying premiums? The policy lapses and you have no protection, just like a renter who doesn’t pay.
What happens if you pay faithfully for the entire term? Just like renting, the price goes up!
If you pay your premiums for a long time, what do you get back? Nothing they are definitely not your mother!
Cash value life insurance is like owning a house.
Part of your monthly mortgage payment pays interest, and part goes into your “piggy bank”, home equity. The value of your property can go up, also increasing your home’s “piggy bank”. Plus, mortgage interest earns you a tax break so Uncle Sam gives you money back.
What happens when you pay your mortgage faithfully? You own your home free and clear, and you don’t owe another penny. You have a permanent, no-cost dwelling.
With cash value life insurance, part of your premium pays for “pure insurance” and part of your premium goes into a “savings account”. This account compounds, growing on its own. As well, Uncle Sam gives excellent tax advantages to this “savings account”.
What happens if you don’t pay your premium? Your “piggy bank” will pay it for you, for as long as there is cash. This can make all the difference during tough times, maybe from illness or layoff.
What happens if you pay your premiums faithfully for thirty years, just like a mortgage? Eventually, the interest from your savings account gets big enough to pay the premiums, so you don’t have to. The policy will never lapse, guaranteeing your heirs a tax-free payoff. Thus, the name “permanent” insurance.
With a good policy held for the long-term, every penny you pay in premium is returned to you, with a bank-like return.
Owning a house costs more at the beginning, and in the end pays you. In the same way, term insurance costs less in the beginning, but much more in the long-term.
These are the two extremes. There are hybrid products that combine term and cash value characteristics. Just like a condominium is a hybrid between renting and owning.
That’s everything I know about insurance.
What should you do? Is term or cash value right for you? Just like renting vs. buying this decision depends on your circumstances and your goals. A seasoned insurance professional representing one or more top companies can help you sort this out for yourself.