Not too long ago, people thought that life insurance was the most important part of estate planning, and that everything else should be built on top of it. In fact, for people with average or low incomes, it was often the only way that people knew of to protect their heirs, especially if they died suddenly. However, the idea of financial planning has changed a lot in the last twenty or so years. People think differently about the need for large life insurance policies now that there are so many different retirement plans available through work, such as IRAs, SEPs, SARSEPs, mutual funds, etc.
Does that mean you don't need life insurance? No. Most people, except maybe the very wealthy, do need some kind of life insurance. However, even the very wealthy may choose to get a life insurance policy (usually whole life) to help pay for funeral costs and estate taxes.
In general, you can choose between whole life (also called permanent insurance) and term life. Variations like universal life and variable life combine some of the benefits of each. Different companies offer different options, but which you need and how much you need are hotly debated topics. People who sell one and make most of their money from it will try very hard to convince you that the other is not a good investment. Here are some things you should know.
The pros of whole life insurance are:
No matter how long you live, you are guaranteed to get a death benefit from #!#.
Most of the time, #!#'s rates don't go up; they stay the same.
- Is an investment that can be cashed out after a certain amount of time.
- After a certain amount of time (15 years, age 65, etc.), many policies are "paid up," and no more premiums are paid.
Can be used to borrow money in case of a financial emergency
- Income from a whole-life policy isn't taxed until it's taken out.
- Can sometimes pay dividends, depending on how solvent the company is and how well it can predict actual costs.
After age 65, #!# can be cashed out and used for retirement.
Whole life insurance has some problems:
- Is more expensive than term life insurance
Most of the time, #!# gives a fairly low rate of interest.
Not until the first 10–15 years does #!# start to gain real value.
If the policy is given up within the first few years, the money that has been paid into it is lost.
- Doesn't tell you how much a mutual fund or other investment is worth.
Pros of Term Life:
Most insurance premiums are very cheap.
The buyer can buy more insurance with higher death benefits if the premiums are lower.
- Can be very helpful if the buyer only needs insurance for a certain amount of time (while paying off the mortgage or while kids are in college, etc.)
- Gives the buyer more money to invest in other things, like mutual funds, stocks, bonds, etc., that give better returns than whole life insurance.
- This type of insurance is often helpful for young families who can't afford whole life rates but still need to cover the main income earner.
Term Life Disadvantages:
Term life insurance only pays out if and when you die. You can never get any of the money you paid for it back.
Even though the premiums are lower than those for whole life insurance, they tend to go up and can become too expensive.
- Term life insurance only lasts for a certain amount of time (up to 30 years), and if you don't die during that time, your premiums are lost.
Almost everyone needs at least one kind of life insurance. What kind of insurance to buy and how much to buy depends on you, your family, and your goals and needs as a whole. In any case, make sure the company you buy insurance from has a good name and enough money to stay in business. Don't let a fast-talking salesperson get you to buy something before you've done your research. If your life insurance company dies before you do, you don't have much you can do about it.
