Demystifying Life Insurance - Term vs. Permanent ... Which is Best?

I'll be honest, the answer to this question has troubled and tormented financial solution providers for years. Some advisors preach the gospel of "buy term and invest the difference." Others proclaim that term insurance is a waste of money, as 97% of term policies never end up paying a claim. Consumers of life insurance products have had the same trouble deciding which type of life insurance is right for them. The answer, as it is with many things in life, is IT DEPENDS.

Therefore, in order to inject some reason and logic into the decision making process regarding the purchase of life insurance, we need to know how each product type works. And I have found no simpler explanation than relating it to something most of us have a handle on: buying or renting a home. Life insurance can be viewed the same way we look at our housing situation. Consider, if you rent a house, you'll have the right to live there for a specified period of time, but you won't own the property, and you won't benefit if the property value goes up. Also, the amount of rent you pay may increase from time to time.

If you buy a house, on the other hand, you may make higher monthly payments, but you'll gain equity in the house that you can keep. You'll also have the right to sell the house, pay off the mortgage, and keep any money remaining from the sale. If the property increases in value, you will benefit if you sell the property. And your house payments probably won't change overtime.

Term insurance is like renting a house. You pay premiums for the specified term of the plan and receive insurance coverage during that time. At the end of the term, depending on the plan, you may have to re-qualify for coverage or renew it at a higher rate if you wish to continue your protection. If your health has changed, you may not be able to qualify or you may have to pay a higher rate.

Permanent life insurance is more like buying a house. It costs more than term insurance, but over time it builds cash value that grows tax-deferred. You can use the cash value in a variety of ways. For example, you can surrender the policy for its cash value, take loans against it, or use it to purchase paid-up insurance. The premium and the death benefit generally stay the same while you own your coverage. And you can keep it for the rest of your life, not just until age 65 or 80 - even if your health changes.

All this being said, which is the right type of life insurance for you? I still can't tell you, but our next few articles will give yet further clarity as to the features, benefits and drawbacks to permanent and term insurance.