Why Does Permanent Life Insurance Cost More?

Understanding the differences between term and permanent life insurance is key when deciding what policy will best suit your needs.  Many times, consumers pass up the benefits of permanent life insurance because it is more expensive than a standard term life insurance policy.  It's important to understand that there is a very good reason for the price difference, and depending on your circumstances, it might be worth the higher premiums.  The article "Need to Know: Life Insurance 101" by Rachel Emma Silverman on The Wall Street Journal website does a great job of explaining some of the differences.

The basic reason that permanent life insurance is more expensive is because it lasts longer and it offers more than just a simple death benefit.  In addition to a payout upon death, permanent life insurance provides an investment component where funds accumulate tax-free much like a savings account.  A portion of your premium is placed in an investment account and this money will grow over the years and you do not have to pay taxes on the earnings.  Most major life insurance companies such as Gerber and American Family Life Insurance offer this type of policy and offer quality products.

If you speak to an investment expert they may see a lot of value in the tax-free investment option.  Not only does the money grow inside the policy tax-free, but if the payout is used, beneficiaries do not have to pay taxes on that income.  A cash-value policy is a good option for people who have contributed the maximum amount to other savings accounts such as the 401k plan.  This is why the extra monthly cost may make sense.  You may have a sense that you are saving your premium instead of paying a company for a service.

Some investment experts will point out that cash-value accounts offer limited investment choices making the higher premiums not worth the extra cost.  If you want the benefits of a permanent life insurance account, but want to save on monthly premiums there is a unique policy available.  It's called a "second-to-die" policy, also known as a "survivorship" policy.  This type of policy pays out when the second person out of a couple passes away and they money will go to beneficiaries further down the line such as children or grandchildren.  In general, these policies cost less than typical permanent life insurance policies but still offer the savings aspect many consumers are looking for.