Term life insurance is often best, financial advisors say — but most people buy another kind

by | Jun 27, 2023 | Financial

Supersizer | E+ | Getty ImagesThere are two broad categories of life insurance, and data suggests many households aren’t buying the most cost-effective one.Americans bought 4.1 million term insurance policies in 2021, accounting for 40% of all individual policies purchased that year, according to the most recent data from the American Council of Life Insurers. About 6.3 million policies, or 60%, were permanent life insurance.But this doesn’t seem to jibe with financial advisors’ general recommendation.”Most people just need term insurance,” said Carolyn McClanahan, a certified financial planner based in Jacksonville, Florida, and a member of CNBC’s Advisor Council.More from Personal Finance:How many credit cards should you have? The answer isn’t zeroAmericans think they will need nearly $1.3 million to retireRepublicans, Democrats divided on Social Security reformHow term and permanent life insurance differLife insurance is a form of financial protection that pays money to beneficiaries, such as kids or a spouse, if a policyholder dies.Term insurance only pays out a death benefit during a specified term, perhaps 10, 20 or 30 years. Unless renewed, the coverage lapses after that time.By contrast, permanent insurance policies — such as whole life and universal life — offer continuous coverage until the policyholder dies. They’re also known as cash value policies since they have interest-bearing accounts. Permanent insurance is generally more costly, advisors said. Policy premiums are spread over a longer time, and those payments are used to cover insurance costs and build up cash value.”Term insurance will probably be the most cost-effective way to address survivor income needs, especially for minor children,” said Marguerita Cheng, a CFP based in Gaithersburg, Maryland, also a member of CNBC’s Advisor Council.Premiums can vary greatly from person to person. Insurers base them on a policy’s face value and the policyholder’s age, gender, health, family medical history, occupation, lifestyle and other factors.Reasons you may need permanent life insuranceThere are three main reasons it may make more sense to buy a permanent policy, despite the higher premiums, said McClanahan, founder of Life Planning Partners. This would aim to ensure there’s an insu …

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