Is your family protected in the event of a tragedy?
While nobody can truly be ready for disaster to strike, there are some things that you can do to ensure your family is looked after in the event of a tragic death. Life insurance is one area where you can take steps to protect yourself and your loved ones.
But with so many insurance types and policy options, which one is right for you?
What is Life Insurance?
Life Insurance, simply put, is an arrangement with a company that, in the event of your death, your family will be paid out a specified sum of money.
In general, those policies are broken down into two distinct classifications; Whole Life Insurance (WLI) and Term Life Insurance (TLI).
Why Would You Use Life Insurance?
Generally, people use life insurance to ease the financial burden of their passing. Looking out for their loved ones from beyond the grave, so to speak.
But, while there are some excellent reasons to buy life insurance, those reasons change throughout your journey through life.
For example, a fresh University graduate with little to no responsibility might not even need a policy. There are no dependents who rely on the new-grad.
Fast forward a few years, and that new-grad is ready to start a family. Again, with two incomes, a rented apartment, and no kids, insurance might not be necessary. But as life progresses, the new couple buys their first home. Suddenly, an expensive mortgage might be a very good reason to look into life insurance.
Over the years, kids come, and continue to grow. Insurance helps give the family peace of mind. But as the years tick on by as they are wont to do, the house gets paid off, and the kids move out and start lives of their own. Retirement savings are churning out their own returns, enough to live on comfortably for the rest of your days. Is insurance still necessary? The financial risks of an early death have all but passed.
Throughout this fictitious life journey, there have been several points where insurance is a good idea: new home, new family, etc. But as the family life changes, so do the needs for insurance.
And those evolving needs bring the focus back to Whole Life Insurance (WLI) and Term Life Insurance (TLI).
What is the Difference Between WLI and TLI?
Whole Life Insurance is a guarantee to pay a specified sum of money on your death. These policies last with you your entire life, which is why they are specified as “Whole Life” policies. Simply put, you pay into a fund, and when you die, your family is paid out a predetermined amount of money.
Term Life Insurance on the other hand, is insurance for a specified term. Usually in 5 year increments, up to 30 years (policies differ greatly, check out each policy thoroughly before purchasing. These policies cover you in the event of your death during the term. At the end of the term, the policy expires, and you are no-longer covered unless you buy a new plan.
What are the Benefits and Drawbacks of Whole Life Insurance?
Whole Life Insurance is designed as a fund you contribute towards over a set period of time, ranging from 5 to more than 20 years. You pay into this fund on a regular basis, and they guarantee a certain dollar amount to be paid out on your death.
The main benefit of this style of policy is that you have a guaranteed amount coming to your family and loved ones when you die.
Also, since this is an investment fund where you are allocating some money, you might even be able to take some of your contributed dollars out as a loan.
But, all that glitters isn’t gold.
Whole Life Insurance policies are expensive. I mean seriously expensive.
WLI policies will cost you thousands of dollars a year while you are funding the account. And, these are investment accounts. As we’ve looked at for our other investment accounts, the companies running them charge exorbitant fees. Furthermore, you cannot get out. There is no money-back option - once you’ve bought, you’re locked in for life.
What are the Benefits and Drawbacks of Term Life Insurance?
Term Life Insurance is also exactly what the name implies. Insurance for a specified term.
Since there is no guaranteed payout, in fact you should hope your family never collects on those policies (to collect means you die), the insurance premiums are reduced. While WLI may cost thousands a year, TLI is only hundreds (if that). The payouts offered are usually much higher as well.
Another benefit is that TLI policies are simple to understand. You pay $X a month/year, for Y years, and if you die before Y years is up, your beneficiaries get $Z.
Again, this type of policy has its own drawbacks too. As TLI policies expire at the end of the term, if you still decide that insurance is right for your family situation, your premiums will likely be higher when you sign for a new policy. The higher premiums are a result of your increased age when buying the policy, as in general, the cost of a TLI insurance policy increases as you age.
Which Life Insurance Policy is Best?
While there can certainly be a case made for different policies, for the vast majority of people Term Life Insurance (TLI) is best. To understand the reasoning, we need to revisit why you would want life insurance in the first place.
People get life insurance to protect their families from the unexpected, especially when the financial burdens of the family would be hard to handle as just one person. But as you age, your financial needs change. The payout of a Whole Life Insurance policy likely isn’t sufficient to help your spouse keep the house and raise the kids when you’re just starting out. In that case, the higher payouts from TLI are more valuable.
And as you advance in your life and financial journey, the payout from WLI shouldn’t be the “make or break” point in your financial position. Death is a fairly permanent next step, so to need to take that step to unlock additional monies is an extreme measure.
Term Life Insurance, with its lower premiums and higher payouts is optimal for almost everyone. And the savings (the difference between a WLI policy and a TLI policy) should be put into an investment portfolio. This invested money will grow over time, and you won’t need to die to access the additional funds.
If you select a balanced, low cost fund, you’ll avoid those high fees and might even come out ahead! Insured when you need it, with a financial safety net built to catch your family if they ever need it.
Life Insurance provides financial peace of mind, knowing that your family will be cared for in the event of your untimely death. Term Life Insurance is the cheaper option, and in the vast majority of cases will be the better option. With the cost differences invested in your own investment accounts, the additional investments and growth will bring you out ahead of a comparable WLI policy.
Financial freedom includes peace of mind. Life insurance can deliver just that, for a nominal cost, at just the right time.
To end this article in the most relevant salutation, I shall borrow the immortal words of Spoc:
“Live long, and prosper.”