What is the Best Life Policy to Buy?

When researching the appropriate life insurance to buy individuals and couples are faced with a myriad of choices. Term, whole life, universal life, variable universal life are just a few of the policies that may be presented, if not sold, to the person.

So which one is best? Generally, it depends.

If someone is looking for the best bang for their buck and wants to purchase the most insurance for the least amount of money term is going to be the best bet. Term is cheap, builds no cash value, and is generally used if someone or couples have a time frame where they need insurance (30 year term for a 30 year mortgage or 30 year term until retirement age). Generally those that are interested in term know that it will run out, but are hoping to “self-insure” their death at retirement since in theory they’ll have saved enough in assets that if one spouse dies, the other can live off of the assets accumulated. Proponents of term will buy term and invest the difference of what the premium would have been for a permanent policy such as whole life.

Whole life is a permanent product and is generally more expensive than term. For the premium you pay you’ll get permanent coverage for life and the policy will build some cash value as you age and keep paying premiums. Whole life will typically pay either a guaranteed interest rate (often 2-4%) or dividends based on the insurance company’s investment experience. Proponents of whole life will argue that it’s a forced way to save as those that say buy term and invest the difference rarely do.

Polices like universal life and variable universal life offer premium flexibility which says a policyholder can vary the amount of premiums paid any given month. Variable universal life, or VUL, will also let the policy owner direct the investments or cash value of the policy in different subaccounts that invest in stock and bond mutual funds. In a VUL, the cash value can fluctuate and interest is not guaranteed as it will rise and fall according to how the underlying investments do.

So which policy is best? Admittedly, I am biased toward term. As a financial planner I believe in the buy term and invest the difference philosophy. After all, shouldan’t a good planner know where to invest the rest and help the client save the difference? I will also admit that I own whole life – not on me – but on my children. This is to protect their insurability. Should any of them ever fall ill and become uninsurable in the future, they’ll always have their whole life policies.

From a planner standpoint, caveat emptor – buyer beware. Several permanent policies have long, hefty surrender charges. This means that for the first 10 to 15 years of the policy if you surrender it or cancel it, you’ll get less than 100% of your cash value. In addition, permanent policies typically pay much higher commissions – so advisors who sell permanent life insurance may be biased to sell you the permanent policy.

Commissions can be as high as 50% of the annual premium for permanent policies and about 40% for term. Since term is cheaper, the less commission is to be paid. And – life insurance is NEVER an investment. Any advisor who says differently is selling you something. Life insurance is just that – life insurance.

In the end, the life insurance decision should be yours, with any advice given to the client by an objective advisor or agent. Don’t be afraid to ask how much commission they’ll make off of the product and why they’re recommending the product they’re selling. If the advisor or agent is captive (they work for a parent company) ask if they can only offer their company’s policies. This should be disclosed.

Finally, shop around. You may find a good deal online or you may find a good deal asking your current auto and home agent if they offer life insurance. Often companies will offer discounts on all three policies if you keep all your insurance business under one roof.