If you consider life insurance an investment, you’re not alone. Permanent life insurance is often sold as an investment wrapped up in an insurance policy, but don’t be too hasty to sign off on the dotted line on a certain product. There may be better options for you, and far better investments. Here’s what you need to know before shopping for life insurance:
Why Life Insurance Matters
Life insurance is there to help replace your income if something were to happen to you. When you’re figuring out how much coverage you need, you should look at having enough to cover your liabilities and providing your replacement income.
So when it comes down to it, life insurance is simply that: A replacement for an economic loss to support your dependents should something happen to you. Even if it’s sold as a tool for education or retirement savings, that’s not what it should be used for. There are actual investments for that. So consider it an income replacement tool and make your decision from that angle.
You should also avoid thinking that your spouse has taken care of all the life insurance for your family. Sit down together and figure out how much coverage you should have and what type of policy works for you. This is something that should be done every few years, because over time your life insurance needs will change.
You may have some insurance options through your employer, but be careful; coverage through your work is often not enough for what you would actually need. Additional coverage might be necessary for your situation.
Permanent Life Insurance vs. Term Life Insurance – Which Life Insurance is Best?
For starters, here is one definition of permanent and term life insurance:
“Permanent insurance typically provides both a death benefit and cash savings. There are different types of permanent insurance, including whole life, universal life, index-universal life, variable life and variable-universal life.
Term insurance provides a level premium and a level-death benefit protection for a stated period of time, such as 10 or 20 years.”
For the average consumer, term life insurance will actually be a better financial option than permanent for most or all of your life insurance. Why? Because it’s going to cover the basics. Instead of funneling more money into your life insurance, you can invest the difference any way you’d like. And it will actually be investing. With permanent life insurance, it’s important to figure out what you’re guaranteed and what’s hypothetical.
Think of it like this: Term life insurance is probably right for you unless you fall under a few exceptions. These exceptions include people who have a permanent need, like a business owner who needs the liquidity in case something happens to him or her, or someone looking to leave a scholarship to their university. They could also include people who need liquidity for federal estate tax payments, certain charitable situations, asset protection against creditors (in certain states) and retirees who want to set up an inheritance. If you are looking for life insurance that doesn’t go away as long as you pay the premiums, some permanent life insurance products will offer that.
But again, for the majority of consumers, term life will provide the coverage they need because the goal is to keep the policy until you are financially independent and living off of your savings.
Permanent Life Insurance Products
If you’re looking at life insurance products, you’re going to be weighing some different options.
Here is a breakdown of the products:
- Whole Life Insurance – As the name suggests, whole life insurance gives you coverage for life. It includes guaranteed premiums, death benefits and cash value.
- Variable Universal Life Insurance – Variable universal life insurance is a cash value option that also has a death benefit and investment option. Unlike whole life, the premiums can vary and it is usually invested into subaccounts that act like mutual funds. Subaccount may have their own internal expenses.
- Universal Life Insurance – Universal life insurance has more affordable protection like a term life policy, but it also has a saving option like whole life. The death benefit, premiums, and savings can be adjusted.
When you’re shopping around for different life insurance options, you’re going to face a lot of choices and gray areas. Take the time to really consider what you’re looking to get out of a life insurance policy, how long you might need it for and whether your money would be better off somewhere else. Making the right decisions now could save (or make) you thousands of dollars richer down the line.
About Your Richest Life
At Your Richest Life, Katie Brewer, CFP®, believes you too should have access to financial resources and fee-only financial planning. For more information on the services offered, contact Katie today.