What You Need to Know About Life Insurance
If you’re considering buying life insurance, generally speaking there are three types. Term insurance gives plain vanilla protection at a low cost. Whole life has a savings component. Return of premium is a hybrid of the two. Most experts generally recommend term life, with low premiums giving maximum coverage at a lower cost. (You can invest on your own the savings reaped by avoiding pricier options.) Here are some of the pros and cons of each type.
1.) Term Life Insurance
It’s inexpensive. A 45- year old male nonsmoker could pick up a million dollar, 30- year term policy for about $2,600 a year, whereas a whole life policy, also known as permanent insurance, could cost 2.5 to 4 times as much.
It’s easy to buy. Just figure out how much you need for how long, and shop for a good rate. Make sure the firm you pick is financially stable by choosing one rated A or better by a service like Standard & Poor’s or AM Best.
It covers a temporary need. Life insurance is meant to provide for dependents. So while you might buy a policy when your first child is born (and increase it as you have more kids), you may only need life insurance for, say, 30 years.
It expires. If at the term’s end you still need life insurance-maybe your company’s pension plan imploded, leaving your spouse ill equipped for life without you-you’re starting from scratch. The older you are, the tougher the term market: If you’re not in good health, you might not be eligible.
2.) Whole Life Insurance
It’s permanent. Provided that you pay your premiums year in and year out, whole life policies never expire. With a whole life policy, you know you’ll leave something behind for your heirs.
It’s forced savings. Whole life policies typically aren’t inexpensive since they build up a savings account (“cash value”) that grows tax-deferred and can be tapped in retirement. For poor savers, it can be a lifesaver. (But your death benefit is cut by the amount you withdraw.)
It’s expensive. Not everyone can afford the right coverage amount. If premiums would be a stretch, it’s better to get a term policy for the right face value. Another problem: People scrape together money for a few years, only to find they can no longer afford the premiums. If this happens in the early years, they won’t even breakeven in terms of what they get as a return of premium. Surrender values (also knows as the cash value of a policy) won’t equal premiums until the policy is 12 to 15 years old.
In our opinion you can probably do better saving for retirement on your own. Whole life policies generally have high costs. 4% to 5% is common and returns vary.
3.) Return of Premium
It’s a compromise. As with all insurance plans, with a return of premium policy, a death benefit is paid if you die. But if you live past, say, the 30-year term, you get your money back. So even if you outlive the policy, money is distributed. It’s more affordable than whole life. But a return-of-premium policy will cost about 50% more than comparable term life.
Don’t expect a return on the investment. If you outlive the initial term, you get back only what you paid in. If you cancel the policy, you get very little. On a 30-year policy, if you walk away after, say 10 years, you may get back only about 9% of cumulative premiums you paid in.
The cost and availability of life insurance depend on such factors as age, health and the type and amount of insurance purchased. Before implementing a strategy involving life insurance, it would be prudent to make sure that you are insurable by having the policy approved. As with most financial decisions, there are expenses associated with the purchase of life insurance. Policies commonly have mortality and expense charges. In addition, if a policy is surrendered prematurely, there may be surrender charges and income tax implications.