Although the thought of purchasing life insurance may not seem like the most appealing thing, the need for it is dire. Just over 60% of United States Citizens actually have life insurance, by which most of those are considerably under insured. Why is this?
“If you have insurance on your phone and not on your life, we need to talk.” Tony Robbins, Unshakeable
Life insurance, as is with most of the financial world, can seem quite complicated. Perhaps this is due to the fact that in the financial world you don't just go to the store and buy something off the shelf. Transaction, done. It takes thought… decision making… and most of us seem incapable of deciding what to eat for dinner.
Let’s see if we can simplify the decision….
What is the purpose of Life Insurance?
Life insurance’s primary function is to pay out an agreed upon sum to the beneficiary of the recently deceased. With that in mind there are a few things we want to consider…
How old will I be? No one know. However, death in itself is a certainty. So therefore, lets focus on…
If you were to pass away today….
- How much money would your family need to pay off any remaining debts? (Mortgage, cars, credit, funeral expenses, medical expenses, etc.)
- Would your family require income replacement?
According to bestliferates.org, the primary reason many people fail to purchase life insurance is because of the misconception that the principles are to expensive. Although I am in no place to tell you what is “too expensive” for you, I can assure you that without it your family will be saying “THIS is too expensive.” The truth is that Whole Life Insurance can be a bit pricey, however Term Life Insurance is a nominal fee in comparison to most of the bills in our lives.
Let’s take a look at Term Life Insurance and Whole Life Insurance in detail….
Term Life Insurance
Term Life Insurance is the more popular and a bit easier to understand. While purchasing a policy there will typically be an offering of a 10 year, 20 year, and a 30 year “term”. If the insured is to pass away during the selected term, the insurance company will then pay out the stipulated amount (called the death benefit) to the beneficiary of the deceased. If you were to outlive your “term” congrats!… but also the money that you have paid is gone and you now go shopping for a new policy.
The Positives: Rates are pretty inexpensive, relatively high death benefit, offered everywhere
The Negatives: Only has a benefit upon the death of the insured, principals fluctuate, commission fees
Whole Life Insurance
Whole Life Insurance is also known as “Permanent life insurance” because it is a policy that is in place for the life of the insured as long as premiums are paid. Since this means the insurance company WILL eventually need to pay out money to your policy, the principal for these policies jump up considerably. Therefore, much like purchasing a house or car, your big decision is going to be over how long of a period you are to need to pay off your policy.
Although the guaranteed payout is an enticing perk for many people to buy this policy, the fact that it builds cash value over time is another fantastic reason. This money will typically grow at a guaranteed minimum rate (sometimes with the opportunity for dividends) in a tax-deferred account. This cash value eventually becomes a nice sum of money that CAN be withdrawn for other reasons (life events, down-payment, etc).
Another nice perk is that if the insured were to become unable to pay their premiums down the road, they can also use their cash value to cover the premiums. Although obvious, I must note that either withdrawing money or using it to pay premiums does take away from the death benefit that would be paid out should the insured pass away before putting it back.
The Positives: Insures you for life, builds cash value, principals are fixed
The Negatives: Rates are more expensive, less agencies offer, commission fees
Although neither plan is perfect for everyone, I implore you to research the plans offered and protect you family future. Death can be the most terrifying thought. However, being prepared for it allows your mind the freedom think about whats more important. Life.