June 13, 2016
A Simple Guide to Life Insurance
Life insurance is often sold as a “one size fits all” product; it will serve as protection and as an investment account that will grow at an impressive interest rate. When you take the time to unwind these products, you will often find that the old saying holds true: “If it seems too good to be true, it probably is.” Like most insurance products, the wording is very confusing and the salespeople are very convincing, which makes it difficult to determine if the policy is right for you. Hopefully these explanations of the various types of life insurance will help clarify what type of policy is truly in your best interest:
- Term Life Insurance – Term life insurance, often called “pure insurance,” is the most affordable type of life insurance. It can be purchased for 10-, 15-, 20-, or 30-year “terms.” For example, if a 30-year old purchases a 20-year term policy, the policy will terminate when the insured reaches 50 years of age. This is typically the most appropriate life insurance, as it covers a point in your life when you need the most amount of life insurance: when your children are young, debt is high(er), and retirement savings balances are relatively low. The need for insurance after 60+ years of age does not really exist for most clients.
- Whole Life Insurance – In my experience, whole life insurance is the most oversold type of life insurance currently on the market. There are very rare situations where whole life insurance makes sense. I have seen salespeople sell these products as a better alternative to 401(k) accounts, college savings plans, etc., which is entirely false. Unlike term life insurance, whole life insurance covers the insured’s “whole life.” In fact, if the policy is still in force when the insured reaches 100 years of age, the insurance company will write the insured a check for the death benefit! Whole life premiums are substantially higher than term life insurance, and salespeople may be inclined to sell a client whole life insurance rather than term life insurance to generate higher commissions. These policies have a “cash value” component of the policy that is often very misleading. For example, if you pay a $100 monthly premium for a policy, $60 may go to the insurance company for the actual cost of the insurance, and $40 may go into a separate forced savings account (cash value). Often times, insurance companies project 7% growth on these cash value accounts, which is entirely unsustainable. There are various components we look at with these policies (“guaranteed” and “non-guaranteed” projected values, dividends, etc.) that are crucial in determining if the product is right for you.
- Universal Life Insurance – If you want to purchase permanent insurance, universal life insurance is typically a better investment than whole life – “guaranteed” universal life in particular. Old(er) universal life insurance policies need to be reevaluated; clients often expect these policies to last their entire lifetime, when in fact they end prematurely due to the internal cash value earning lower than anticipated interest rates. Insurance companies solved this problem by issuing guaranteed universal life insurance policies. These policies will stay in force even if interest rates aren’t as projected (as long as certain conditions are met). There is a subset of universal life insurance called variable universal life insurance which is simply “gambling” with your life insurance.
Most consumers will be much better off by purchasing term insurance rather than either type of permanent insurance, but certain situations may warrant the need for permanent life insurance. If you have any of these policies and have specific questions, please don’t hesitate to contact me (by phone or email) for evaluation.