The major debate in insurance is whether term life insurance or cash-value life insurance is superior. What makes this debate protracted and contentious is that different ‘experts’ have contrasting opinions. There is a body of arguments to justify that term life insurance is better. Naturally, there are those who believe that cash-value life insurance is a complete financial plan and that term insurance is a waste of money. Weighing the arguments is crucial, although you may be left with more questions than answers.
There are two fundamental differences between term life insurance and cash value life insurance. Cash-value life insurance is considered permanent because it exists for a lifetime or up to age 100 (whichever comes first). The fact that this form of life insurance carries a cash-value or interest-bearing account is also a significant differentiator. Term life insurance carries no cash value and exists for shorter defined periods.
What you must realise is that it is difficult to objectively assert that term insurance is better than cash-value life insurance or vice versa. The best life insurance plan for you is based on your needs and circumstances. This is not a cop-out comment either. Sometimes a cash value plan offers supplementary benefits that are not available on term life insurance plans. As a result, you may have a better overall package.
Some term insurance plans have higher premium rates than others (depending on the insurer). Then, there is absolute rubbish in the form of refundable term life insurance. So, to make a blanket statement about one form of life insurance over another may be irresponsible. You must consider particular products and determine whether they suit your circumstances.
The main merits for term insurance would be:
a) Much cheaper- providing more coverage for less
b) No fees or hidden charges
c) Less complicated
d) No ongoing obligation
The main merits of cash-value life insurance include:
a) Forced savings- especially for those who wouldn’t invest a dime of the ‘difference’
b) Permanence- can be used as a reliable estate planning product
c) More comprehensive optional supplementary benefits
d) Cannot lapse easily
It is pointless to argue for the primacy of one type of life insurance over the other. As an insurance advisor, this issue was at the forefront of my focus. However, it soon became clear that one really must assess a group of policies against the circumstances and behaviour of a client and make a selection according to the merits/ demerits of a plan with reference to a combination of the client’s preferences and circumstances.
Indeed, the argument that term insurance is good is a cogent one. It is sometimes the better plan when you cannot afford high premiums or have a short term insurance need (mortgage protection) However, there are certain cash-value plans that can be very competitive and offer tremendous benefits on a head-to-head with a term plan. So-called experts tend to reduce the debate to a mathematical endeavour, but it is not as uncomplicated as that. Both term insurance and cash-value plans have their ‘moments’.
What matters is what the right answer is for you. Fortunately, there are some basic questions that you should ask.
1) How much life insurance coverage do I need?
2) How much can I afford on a particular plan?
3) How long do I need the coverage for?
4) What other benefits are available?
5) Am I disciplined enough to save money on my own?
From my own experience, term insurance plans are often more straightforward and less deceiving than cash-value plans. Prospective life insurance buyers should be more wary of cash value plans, especially as their contracts are more intricate. However, asking the right questions would reveal the answer to this never-ending debate- as far as your circumstances. In the final analysis, getting the best life insurance plan for your circumstances is what matters.