Joe and Debra are in their early 30’s. They have 27 years left to pay on their mortgage. Both of them have full-time jobs making it no problem to afford their mortgage. On the flip side, if one of them are no longer in the picture, taking care of their monthly mortgage payment along with their other bills will get tight in a hurry. A life insurance policy could be designed to pay for their home, replace lost income (remember it may take some time to acclimate to one income), and take care of final expenses (i.e. funeral costs).
Term Life Insurance
Term life insurance has a specific start date and a definite ending date.
Let’s say you buy a 20 year Term life policy that starts today. 20 years from today it will expire.
The only way you would use the policy is if you pass away during the policy period. If you live past the end of the term, the policy pays nothing.
Typically you can purchase 5, 10, 15, 20, or 30 year terms.
Premiums are locked in for the duration of the policy. So you don’t have to worry about an increase in premium during the policy period.
This type of life insurance is known for being the least expensive.
Term Life Insurance is designed to take care of your temporary needs. If you have a mortgage, car loan, student loans, kids and spouse at home, etc. The idea is to be able to provide for your family financially if you’re no longer in the picture.
Ideally, once your mortgage is paid off, the kids have graduated college, and your expenses have dwindled, a large life policy may not be necessary. It really depends on your situation.
Every few years it’s a good idea to reevaluate your needs. Maybe you bought a bigger house or recently had a kid. Life doesn’t stay stagnate. You might need a second life policy to cover your needs.
Who Should Buy Term Life Insurance?
Everyone. No, really…
Do you have someone at home depending on you?
Thinking about your own mortality or the loss of your significant other is a bit gruesome and overall hard to comprehend. Thinking about how you’re going to pay your mortgage or rush back to work after a loss because you can’t afford to be off work won’t be any easier.
Term Life policies are the most affordable.
Term Life Insurance
Has a specific start date and expiration date
Can be purchased in increments of 5, 10, 15, 20, and 30 years
Premiums locked in
Whole Life Insurance
Builds cash value
Cash value may be borrowed during the policy period
Coverage guaranteed for your lifetime (as long as premiums are paid)
Offers tax deferred cash value
Whole Life Insurance
Also known as Permenant Life Insurance. The policy covers you for life. It has a definite start date and lasts until you pass away.
Your premium is locked in for as long as you own the policy.
This policy is designed to accumulate Cash Value. Over time a person could borrow against the policy. Let’s say you have a $50,000 Whole Life policy that has accrued $5,000 of cash value. You want to throw a big party so you borrow $3,000 from your policy. This will reduce your Death Benefit to $47,000. What I mean is, if you pass away before you pay the $3,000 back, your beneficiary will receive $47,000 (not the full $50,000).
If you choose to pay the $3,000 back, know that there will be interest due on top of that.
One other thing to note about Cash Value, when you pass away, your Beneficiaries won’t receive the Death Benefit plus Cash Value. They only receive the Death Benefit. The Cash Value is a living benefit to you as the policyholder. Your $50,000 Whole Life policy may have $5,000 of Cash Value, but that doesn’t mean your Beneficiary would receive $55,000.
Don’t mistake Whole Life Insurance for an investment. Yes, it will accrue interest, but it shouldn’t be what you lean on for retirement.
Whole Life is more expensive than a Term policy.
Who Should Buy Whole Life Insurance?
Here are four instances where Whole Life Insurance makes sense:
Estate planning: Long story short, this is a way to provide a lump sum of cash for your beneficiaries.
Business planning: May help fund a buy-sell agreement or retain key employees.
Final Expense: A life insurance policy designed for people over the age of 70. Coverage for these types of policies are small ($5,000 – $20,000). Final Expense policies come in the form of a Whole Life policy.
Kids: Life insurance for a kid is inexpensive. Let’s say you purchase a Permanent Life policy for your child today and next month he/she is diagnosed with something making them uninsurable. As long as the premiums are paid, your child will have the policy with them for as long as they live.
Rodney and Ashley have worked hard for several years to build their business. They have 2 children. 1 is active in the business while the other is pursing other interests. Rodney and Ashley have a succession plan in place so the child that is active in the day-to-day business will be able to take over. To keep things fair they have purchased a life insurance policy of equal value to the business naming their second child as beneficiary.
Cost of Term Life Insurance vs Whole Life – Males and Females
One of the number one questions with life insurance, “how much does life insurance cost?”
Here’s a real life example for folks living in Missouri. In the quotes below I’m using Cincinnati Life Insurance to compare a traditional 30 year Term Life versus a Whole Life policy. Both policies have a death benefit of $250,000. I have broken it down among men and women ages 25, 30, 35, and 40 years of age. All premiums shown are annual.
Whole Life Insurance can have a time and a place in certain situations. It’s better to sit down with an insurance professional to help outline a game plan for you and your family.
How Much Life Insurance Do I Need?
Dave Ramsey will tell you you need 10-12 times your current income.
On a piece of paper answer these questions:
1. How much do you owe (home, auto, student loans? Credit cards?)
2. If your spouse is no longer in the picture, how long would you need their income? One year, 10 years, 20? Take their annual income x the number of years you would need their income.
3. What would it cost to pay for a funeral/burial?
4. Do you want to leave any money for your kids future education or maybe a charity?
Now add them up. What do you get?
That’s a good starting point.
Look at your monthly budget. Talk with your insurance agent. Maybe you can’t afford exactly what you need right now, but something is better than nothing.
You’re not getting any younger…this very moment will be the most affordable life insurance will ever be for you. The younger you are the better pricing you will receive.
Your health also impacts the price of life insurance. Let’s face it, generally, the younger you are the better your health is. Therefore you can lock in the best premium now.
What are you waiting for? Get a policy in place. Get it started.
You owe it to your family.
You owe it to yourself.