Why You Should Avoid Permanent Life Insurance
Permanent life insurance is a type of insurance that covers you for your entire life, as long as you pay the premiums. Sounds good, right?
Well, not so fast. Permanent life insurance is often marketed as a great investment that can provide you with cash value, tax benefits, and a legacy for your heirs.
But is it really worth it?
In this post, we will reveal the truth behind the hype and explain why permanent life insurance is bad for most people.
Here are some of the reasons why you should avoid permanent life insurance:
It is Expensive
One of the biggest drawbacks of permanent life insurance is that it is very expensive compared to term life insurance. Term life insurance is a type of insurance that covers you for a specific period of time, such as 10, 20, or 30 years.
Term life insurance is much cheaper than permanent life insurance because it only pays out if you die within the term. For example, according to Policygenius, a healthy 30-year-old male can get a $500,000 term life policy for 20 years for about $21 per month, while a $500,000 permanent life policy for the same person would cost about $540 per month.
That’s a huge difference!
It is Complicated
Another reason why permanent life insurance is bad is that it is very complicated and hard to understand.
There are many types of permanent life insurance, such as whole life, universal life, variable life, and indexed universal life.
- Whole Life Insurance: Provides coverage for your entire life. Has Fixed premiums, guaranteed cash value growth, and a death benefit payout to beneficiaries.
- Universal Life Insurance: Offers flexibility in premium payments and death benefit adjustments. Allows policyholders to change premiums and death benefits, and accumulates cash value with interest.
- Variable life insurance: Combines life insurance with investment options. Policyholders can allocate premiums to investment accounts, potentially yielding higher returns but subject to market fluctuations.
- Indexed Universal Life Insurance: Blends flexibility and investment potential tied to market indexes. Allows adjustments to premiums and death benefits, with potential cash value growth based on specific market indexes.
Each type has its own features, benefits, risks, fees, and charges. Some of them have fixed premiums, while others have flexible premiums. Likewise, some of them have guaranteed cash value, while others have variable cash value.
Some of them have fixed interest rates, while others have variable interest rates. Some of them have surrender charges, while others have no surrender charges.
It can be very confusing and overwhelming to compare and choose the best option for your needs.
It is Not a Good Investment
One of the main selling points of permanent life insurance is that it can build cash value over time, which you can access through loans or withdrawals. However, this is not a good investment for several reasons.
First, the cash value grows at a very low rate, usually around 2% to 4% per year. This is much lower than the average return of the stock market, which is around 10% per year.
Second, the cash value is subject to fees and charges, such as mortality and expense charges, administrative fees, and investment management fees. These fees can eat up a large portion of your cash value and reduce your returns.
Third, the cash value is not guaranteed and can fluctuate depending on the performance of the underlying investments. If the market goes down, so does your cash value.
Fourth, the cash value is taxable if you withdraw more than what you paid in premiums. This can reduce your net income and affect your tax bracket.
Fifth, the cash value reduces the death benefit that your beneficiaries will receive. If you die with a loan or withdrawal outstanding, the amount will be deducted from the death benefit, leaving less money for your loved ones.
It is Not Flexible
Another reason why permanent life insurance is bad is that it is not flexible and can lock you into a long-term commitment. Once you buy a permanent life policy, you have to keep paying the premiums for the rest of your life, or until you surrender the policy.
If you stop paying the premiums, you will lose the coverage and the cash value. If you surrender the policy, you will have to pay taxes and surrender charges, which can be very high.
Furthermore, If you want to change the amount or type of coverage, you will have to go through a new underwriting process, which can be time-consuming and costly.
Additionally, If you want to switch to a different provider, you will have to start from scratch and lose the benefits of your existing policy.
It is Not Necessary
The final reason why permanent life insurance is bad is that it is not necessary for most people. The main purpose of life insurance is to provide financial protection for your dependents in case you die prematurely.
However, most people do not need life insurance for their entire life. As you grow older, your financial obligations and dependents decrease.
You may pay off your mortgage, your children may become independent, and you may accumulate enough savings and assets to cover your final expenses and leave a legacy.
In that case, you do not need to pay for an expensive and complicated permanent life policy that will not benefit you or your heirs.
Conclusion
Permanent life insurance is a type of insurance that covers you for your entire life, as long as you pay the premiums. It is often marketed as a great investment that can provide you with cash value, tax benefits, and a legacy for your heirs.
However, permanent life insurance is bad for most people because it is expensive, complicated, not a good investment, not flexible, and not necessary.
You are better off buying a term life policy that covers you for the period of time that you need, and investing the difference in a diversified portfolio that can generate higher returns and lower taxes.
This way, you can achieve your financial goals and protect your loved ones without wasting money and time on a permanent life policy that will not serve you well.
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Greetings, I’m Evans Odundo, a dedicated professional holding a Master’s Degree in Software Engineering from Daystar University.
My blogging journey is fueled by a profound interest in insurance companies, and I take pride in unraveling the intricacies of their coverage.
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