Most of us have heard that famous financial entertainer who recommends “buy term and invest the difference.”
While buying term life insurance can be an important decision for any family’s protection plan, there is a lot to consider in this strategy, and it isn’t quite that simple.
Currently, about half of American adults have life insurance, and 42% say they need life insurance or require additional coverage.
One problem with the recommendation to only “buy term” is that most people often don’t know what “the difference” would be. For example, would you be paying $1,000 per year for a $1 million life insurance policy and investing $8,000, $10,000 or $15,000? Even if you knew the exact difference between term insurance and whole life costs, are you specifically adding that amount to the savings you were already putting away?
Term Insurance
Term insurance can be a valuable tool in your financial plan. It can protect a family with young children, provide the means to pay off a house if the primary earner passes away, and prevent the family from having to alter their lifestyle, among other benefits.
Keep in mind that, statistically, only about 1% of term policies actually pay out. If a 30-year-old with young children gets a 20-year, $1 million term life insurance policy, chances are they will still be alive at age 50—they have outlived the term of the policy. Young families carry this type of insurance not primarily for the payout, but for peace of mind, which is invaluable. If you knew for a fact that you would be alive after your term policy expired, of course, you wouldn’t get it. There are other things you could spend $20,000 on over the next 20 years; if invested, that money could also yield a reasonable return.
Whole Life Instead?
The difference between term and whole life insurance is that with whole life, as long as you pay the premiums, your coverage continues indefinitely. If you chose to spend that $20,000 in premiums on whole life, you wouldn’t get nearly the same level of insurance coverage as with term, but you would likely have your initial investment returned, and potentially more, through cash value accumulation or the eventual insurance payout.
Do I Really Need It Later in Life?
Some may argue that after the mortgage is paid off or the kids have grown, there isn’t much need for life insurance. That is likely true, but you may need it for asset insurance.
A fully-funded whole life policy can provide the coverage needed so that medical expenses and other costs are paid. This allows your family to benefit from receiving that vacation property, paying the taxes on estate assets or other inheritances, because your life insurance acts as a protection for those assets.
Living Benefits
The benefits of life insurance aren’t limited to when you pass away. Cash value can be used in a tax-advantaged way. You can draw from the cash balance tax-free to pay for expenses, accelerate the death payout in some cases if diagnosed with a terminal illness, and even use the cash when the market is down. This would allow your investments to recover, helping your retirement assets last much longer.
Conclusion
The only life insurance that matters is the insurance you have the day you die. Having the right blend of term and whole life can help preserve your financial plan. If you need help determining the best solutions for your needs, please reach out. I’d be happy to have a conversation to guide you through the process.
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This article is for informational purposes only and is not tax, legal or financial advice. Everyone’s situation is different, so consult a financial advisor. If you would like to connect with me, please call 615-619-6919 or email me at smoran@redbarnfinancial.com. Learn more at redbarnfinancial.com.
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Photo, top, courtesy Kampus Production / Pexels
