The only good life insurance is the insurance that is in force on the day you die. The check to the beneficiary does not note whether this policy was a 10, 20 or 30 year term product or permanent policy. It does not matter if it had cash value earning interest or invested in mutual funds. It does not matter if you bought it at work or at home. The policy only has to be in effect when death occurs.
So what is the right kind of life insurance to buy? First and foremost, it is based on what the need is. Insurance is bought for many reasons; sometimes it is to cover a loss, sometimes it is to cover your financial obligations while your children are being raised. Other times it is to provide for a spouse forever or it could be to pay estate taxes. On the other hand it can be used for business partners to buy out your interest in the company or to keep the business going. There are as many reasons as there are people that buy life insurance. It can really be broken down to three major categories.
Either: 1) you love someone, 2) you love your business, or 3) you have a significant financial obligation.
Since all life insurance products are actuarially equivalent (see “How is life insurance priced?”) the right kind is the one that matches the time of the obligation. You know a 15 year loan will be 15 years in duration therefore a 15 year product is appropriate. Now the tricky part is to obligations that do not have a fixed expiration or will always be there. Some examples of these are coverage for a spouse, coverage to provide for a disabled dependent, estate tax planning and partner buy outs just to name a few.
The bottom line is a permanent obligation requires permanent coverage. A temporary obligation requires temporary (term) coverage. Do not try to solve a permanent problem with a temporary product. So how long is your obligation for? If it will always be there, look at a permanent answer. Remember; make sure the insurance does not run out before the need does.
© R. Allen Greer, Jr., 2007
