Pick life insurance for your needs
With the multitude of "financial experts" around these days, we are constantly bombarded with advice regarding life insurance. When it comes to buying the best life insurance, the experts usually break down into two camps: The people who believe that permanent life insurance, such as whole life and universal, is the only way to go, and other people who espouse the "buy term and invest the difference" philosophy.
With newspaper columnists giving their view, magazine writers offering a different theory, life insurance professionals and financial consultants giving yet another recommendation, which one is best? The simple answer is: What’s best is what is best for you.
Evaluate the true cost
The chief reason people choose life insurance coverage is for protection, to provide financial security for dependents after the death of the insured. Both permanent, such as whole life, and term insurance can supply that safety net, but which one does it more efficiently?
Term insurance is attractive because it has a lower premium, which often makes it the policy of choice for younger people with limited means and few financial responsibilities. Term insurance offers a fixed death benefit for a specific period, such as one year or five years. At the end of that time, the coverage is usually renewable at a higher premium.
On the other hand, whole life insurance offers a fixed premium for an entire lifetime, a potentially increasing death benefit, and coverage that will not terminate, provided premiums are paid when due. With term insurance’s increase in premium at each renewal, over the course of several decades, the cumulative cost of term coverage may well surpass that of a comparable whole life policy.
In addition, some term policies may require evidence of continued good health with each renewal. If you become unisurable in the future, you may not be able to renew the policy.
Know the true value
The well-known analogy of a term policy as renting and a permanent policy as owning life insurance is a good way to illustrate their true values. Unlike term insurance, whole life insurance is a value builder. It accumulates cash value that in the long term can be borrowed against to help fund children’s educations, supplement retirement income, or provide for other needs. In addition, as an owner of permanent insurance, your policy is also eligible to earn dividends, if and when they are declared by the insurer.
Investing the difference
If term insurance is chosen instead of a permanent policy, you’ll have to decide where to invest the leftover money. The success of "buy term and invest the difference" depends largely on where the leftover funds are invested. Stocks, bonds and mutual funds offer the potential of a high return, but one thing is certain: uncertainty. With these investments, your return will vary based on market conditions; and when you sell your investment you may receive more or less than you originally paid.
This potential volatility may not be suitable for some individuals, particularly risk-averse people and mature individuals nearing retirement. In addition, capital gains, dividends and most interest are taxable when distributed. With permanent insurance, your policy accumulates guaranteed cash value on a tax-deferred basis.
When weighing your options, consider whether you will have the discipline and the means to invest regularly. Often people are so burdened with everyday expenses that they neglect to put something aside for the future. If this occurs within a "buy term and invest the difference" framework, the whole strategy collapses. Without the invest component, you’re left with a term policy with no accumulation of funds for the future.
Choosing the most effective way to secure your family’s financial future is a major decision that requires a good deal of thought. For some, "buy term and invest the difference" may be a legitimate option, while for others, permanent insurance is the way to go.
Before jumping into the unknown, discuss your options with an insurance professional from a respected company. Study policy illustrations and ask questions when necessary. If you’re uncomfortable with a scenario presented to you, get a second opinion. There’s no cost or obligation. When you have all the facts, then you can make an intelligent decision on what’s best for you and your family’s financial future.
Kristin Hilderbrand is an associate of The Wilson Agency LLC in Anchorage.