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Level Term Life Insurance Protects While Leaving Cash For Smart Investing

By Mike Heuer

Level term life insurance was the first kind of life insurance policy ever created and remains the smartest purchase for most people who choose to go that route to protect assets and financial obligations against the potential loss of a family’s primary earner. Unfortunately, studies show about 70 percent of all policies sold are whole life insurance, which costs a great deal more and often times proves to be a bad investment.

A level term life plan in its most basic form provides a great deal of insurance protection without a great deal of cost for a fixed number of years at the same rate each month and then expires. A simple investment of about $10 per month for many people can yield an insured amount of more than $100,000 with rates determined by mortality tables and not a medical exam. The younger you are, the less expensive the rate likely will be due to an anticipated long life span.

Unlike whole life policies, which build cash value over time, term policies do not have a cash-building component and simply provides a cash payout if the named insured should die while the policy is in force. Because they do not accrue cash values yet still offer a great deal of protection for a low rate, the policies are considered to be the purest form of life insurance.

And a big advantage over whole life plans, which also are known as permanent life insurance, is the fact term policies do not come with high fees or other costs. During the first three years or so that a permanent life policy is in force, virtually all premiums paid are used to pay for agent commissions and maintenance fees. The policies do not actually grow cash value until after the third year, and then only at a yield of less than 3 percent annually for whole life and about 7.5 percent for variable whole life plans, which include investments in mutual funds. But those same mutual funds can yield up to 12 percent annually when used as a separate investment tool.

And that is where term life plans can make it easier to yield greater retirement income than whole life plans, which charge more than 10 times as much as term coverage for the same amount of life insurance protection. Many investment advisors suggest foregoing whole life plans in favor of term policies and investing the difference in mutual funds or other investments with a greater yield over time. Smart investing can result in a great deal of life insurance protection while at the same time leaving enough money left over each month to provide a great deal of return potential on smart investments.

While whole life plans are not always bad – the right one can provide a nice financial legacy with no taxes to whittle down the cash benefit. But term policies can help smart investors provide an even larger return on their investments by freeing up more money for the right investment vehicles.