Maybe you’re young and just starting a new family, or maybe you’re older and thinking about protecting your family’s financial future for the long-term. Either way you realize that life insurance is a critical component of long-term financial planning of responsible people. The question is should you buy term life insurance, or would it be better to go for some form of permanent life insurance? I’ll attempt to answer this question in this short article, as well as describing a couple of absolutely critical things to look at if you buy term life.
Maybe a knowledgeable friend or relative has told you to think twice before you purchase whole life insurance. While whole life gives you the assurance that your loved ones will receive a payout at the time of your passing or when you reach the age of 90 or even 100 years old, and term life insurance does not, there are some very good reasons why whole life is not the best choice for most people.
Now an insurance agent will attempt to sell you on the idea that there is an investment component to a whole life insurance policy, and in addition to a guaranteed payout this makes it a good choice. Whole life has what’s called a cash value amount that earns interest over the lifetime of policy. Basically your premiums, which are quite high to begin with, work for you and for the insurance company, so that they equal or exceed the payout amount when the beneficiaries are paid. It sounds fair but the problem is that the premiums constitute a substantial financial commitment does benefit really does not add up over the long term. There are a couple reasons for this. First of all whole life has many miscellaneous fees that are not necessarily disclosed to the policyholder. Another reason to decline whole life is the way that term life insurance simply fits very easily into a smart long-term overall financial plan.
(There are other forms of permanent life insurance like variable life and universal life, that give you flexibility and control over the policy and the cash value amount, and you should look at these policies. They involve a degree of risk and a level of financial expertise that you may or may not possess. They are covered in depth elsewhere on this site, but in this article I want to focus on the clearest choice for people who prefer a hands-off approach to their life insurance, because those people are best suited to term life.)
The real attraction to buying term life insurance is that as cheap as it is, you should be left with some cash each month that you can put towards an investment portfolio. The idea is that over time your portfolio is likely to be worth more than the payout amount of a whole life insurance policy. We are talking decades here to build up a nest egg yourself, while paying premium amounts that are a small fraction of their whole life counterparts. I mentioned flexibility and freedom with other policies: the small term life premiums alone represent freedom that you will have over what you do with your finances.
So how to avoid finding yourself in your 50s or 60s, at the conclusion of a term life policy, with no life insurance at all after having paid into a policy for decades? Make sure you at least look into getting a term policy that is renewable so that you can extend your term coverage, or convertible into a whole life policy at that time. These features will increase the cost of your original term policy, but they are a good middle ground that enabled you to pay relatively low premiums for decades while building a nest egg, while ensuring that you always have life insurance. Note that converting to a whole life policy when you are much older still leaves you plenty of autonomy towards your own finances during your prime earning years, with the much lower term premiums. Incidentally often these policies are called guaranteed term life insurance, or guaranteed level term, where you are assured that the premiums will not increase over a defined period of time, in the early years of the policy.
It’s very easy to buy term life insurance online, but a good agent can answer all your questions, and explain all of your options to you. Just make sure you talk to when you can trust, because the fact is that agents tend to make a lot more money from selling whole life than they do selling term life insurance policies.