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Think twice before buying this type of life insurance: 'People who shouldn't be sold this policy are being sold it'

"I went on my mission asking different experts and CFPs if permanent insurance is scam."

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Twenty/20

When it comes to life insurance, you have two main options: term or permanent.

Term life insurance is a policy that lasts a certain number of years. Permanent insurance can last for a policyholder's entire life and typically offers a cash value component. This means that a portion of the premium you pay goes into a cash value account, which will grow at a rate specified by the policy.

Once the cash value has reached a certain size, you can borrow money from the insurer and use it as collateral. There are several kinds of permanent life insurance, including whole life and universal life, and they are typically significantly more expensive than term.

In her new book, "Financial Adulting: Everything You Need to be a Financially Confident and Conscious Adult," Ashley Feinstein Gerstley seeks to break down what type of life insurance makes sense for more people.

Through interviewing policy holders and financial experts, Gerstley, who is also founder of money-coaching company The Fiscal Femme, found that many people who don't need permanent life insurance were paying for it.

"I went on my mission asking different experts and CFPs if permanent insurance is scam," Gerstley says. "They all agreed that people who shouldn't be be sold this policy are being sold it."

Here's the difference between term and permanent life insurance policies.

When to get term life insurance

Term life insurance policies typically last 10, 20, or 30 years. The number of years you want the policy to last depends on your particular needs, says physician-turned-financial-advisor Carolyn McClanahan, a CFP and the founder of Life Planning Partners in Jacksonville, Florida. For example, a parent might want a policy that would help replace their income and cover the costs of raising their children.

"If you have children, they generally take about 20 years to 'launch,' so a 20-year term policy should cover that need in case you die prematurely," she says.

If your spouse is dependent on your income, you might opt for a policy that lasts a bit longer. "If you are in your 30s, you could get a 30-year term policy to cover your life while you are working, with the idea that you'll be saving along the way so that your spouse could live on the savings if you die when the term insurance runs out," she says.

If you have children, they generally take about 20 years to 'launch,' so a 20-year term policy should cover that need in case you die prematurely.
Carolyn McClanahan
CFP

This policy could apply to anyone who you name as a beneficiary, not just a spouse or biological family member, Gerstley says. "It could be your chosen family," she says. "Anyone who would miss your income if you weren't there."

You may need life insurance if you have cosigned debt, which can happen with student loans. If you're in your 20s and cosigned loans with your parents, they may have to take over payments if you die. A life insurance policy could help cover those costs.

When to get permanent life insurance

Many people who opt for permanent life insurance policies often don't understand what exactly they are paying for, Gerstley says. "Many people who have purchased permanent life insurance were advised to do so," she says. "I have a client who was told it was just a savings plan."

McClanahan agrees that permanent life insurance is sold to people who don't need it "way too often."

"Some insurance agents will sell it as a 'retirement investment,' she says. "Yes, it builds cash value, but there are many limitations in how that cash value can be utilized in the future."

If no one is relying on your income, you don't need life insurance.
Ashley Feinstein Gerstley
Founder of The Fiscal Femme

There are a few instances where permanent life insurance make sense, McClanahan says. "If you have a need for life insurance that won't go away or if you want to guarantee a legacy for your family, you should consider permanent life insurance," she says. "For example, if you have a special needs child who may need care long after you are gone, you may want to get permanent coverage."

However, many of her clients would benefit more from term insurance, she says.

"You only need life insurance if someone would suffer financially if you die or if you want to leave a legacy and don't have the savings to do so."

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