The odds are that your idea of a good time does not include shopping for life insurance. As depressing as thinking about your death may be, studies show that everyone dies! Life insurance is a great way to make sure that you leave a legacy, rather than a burden to the people you love. Deciding whether a cash value policy or a term life policy best suits your needs is the first meaningful decision you will need to make when shopping for life insurance plans. If you find yourself stuck in the middle of this debate, here are some things to consider.
What is Cash Value Insurance?
Cash-value life insurance is an insurance policy that features a savings or investment product. There are a variety of cash value plans, and they include universal life, whole life, indexed universal life, and other life insurance plans. Whatever type of cash value plan you are considering, they typically provide lifetime coverage. If you pay the policy premiums, the policies will benefit your beneficiaries upon your passing. The funds invested in the plans will grow over time and will eventually cover the premiums.
The popularity of cash value plans is due in no small part because the money you invest in these plans is permitted to grow on a tax-deferred basis. You do not pay any money on the gains in these accounts while your plan’s value increases! Policyholders may withdraw funds when closing the policy or keep the policy active and borrow against the plan’s cash value. Some plans also feature long term care riders, which will allow insured parties to take an advance against the policy’s death benefit to pay for nursing home expenses.
The most significant downsides to cash value plans are their fees, large premium payments, and relatively low coverage limits. Cash value plans can pay big commissions to sales agents, which drives up the costs of these plans. To see just how much more expensive these plans can be than a similar coverage amount term policies, consider that a $500,000 term life policy could cost only $430 a year for a healthy 35-year-old. A $500,000 universal life policy might cost up to $4,400 a year for that same person!
There are two other meaningful downsides to cash value plans. First, the plan’s cash value goes to the insurance company when you die. A $50,000 whole life plan with a $20,000 cash value will pay your beneficiary $50,000 when you die, and the company will keep the $20,000 invested in the policy. Second, loans taken against the plans’ cash value can cause the plans to run out of money and require substantial monthly payments to bring up to date. The plans often expose older people to surprise cost increases that can lapse policies and cost a fortune. These surprise bills sparked a wave of lawsuits around the country and gave new clients a good reason to pause before buying a cash value plan.
How Does a Term Life Insurance Plan Work?
The beauty of a term life insurance policy is its simplicity. The plan does not feature any investment or savings element. There is no return of premium features, surprise rate increases, or riders that fund long term care. Term life insurance works the same way car insurance works. Insured parties get a policy that will remain in effect for some time, typically between 10 and 30 years. They will make regularly scheduled premium payments during that time. These policies payout only if the covered person dies while the plan is in place.
Term life insurance is a competitive industry, and pricing is as transparent as it is cutthroat. To give you an idea of the going rate for term life insurance policies, consider that a healthy 59-year-old-man could be paying as little as $27 a month for a $100,000 plan. That is a great way to leave a legacy without breaking the bank!
So Which Makes Sense?
Many people would do best just to get a term life insurance policy in place and ignore the cash value options. Financial experts suggest getting between 8-12 times your average annual salary in 20-year level term insurance. This will provide peace of mind to those you love at a very affordable rate. While whole life insurance was the most popular option for our parents’ generation, changes to insurance regulations and tax laws make it an expensive choice for most Americans.
A growing body of data suggests that the “buy term and invest the rest” strategy is a surefire way to financial success. To use this strategy, you simply price out a term and a cash value policy. You buy the term coverage and save the difference in a low fee index fund. That will grow over time and build up a meaningful legacy that you will keep if you outlive the term coverage.
Suppose you cannot get a life insurance policy in place due to diabetes, cancer, or other major health issues. If you are finding that getting a policy underwritten is a challenge due to your health conditions, consider buying guaranteed issue term life insurance. This option is always more expensive, but that added expense ensures that your family will have coverage if you die. It may also be worth considering mortgage payoff insurance if you find yourself in a position where you cannot qualify for other life insurance plans.