You’ve probably heard a joke about the boring nature of life insurance. When confronted with something exceptionally dull, one might say, “I’d rather spend the day at a life insurance seminar!” Funny indeed. Yet having the right type and amount of life insurance is no laughing matter.
The (short) term option
Many people begin their life insurance experiences with the purchase of a term policy. Here, the buyer makes regular premium payments in exchange for a set sum to be paid to his or her designated beneficiaries if the policy owner dies during the specified “term.” This period generally ranges from five to 30 years.
Many, if not most, people buy term coverage because of its low cost. The downside to dollars saved is that the policy must eventually be renewed or you’ll fall into the ranks of the uninsured. Many insurers raise a term policy’s premiums upon renewal and this coverage offers no cash value. (We’ll discuss cash value more in the next section.)
Still, term policies can offer affordable coverage while you deal with other financial responsibilities. For example, a younger person in good health who’s facing short-term debt, such as a manageable mortgage or tuition payments, could be well served by a reasonably priced term policy. Parents may also want to opt for term coverage while their children are of dependent age.
A permanent investment
At some point in life, many people should strongly consider a permanent (or “whole life”) policy. True to its name, permanent coverage never expires as long as the premiums are paid.
These policies typically comprise an insurance component providing a death benefit and an investment component offering the cash value mentioned above. The lifetime “in case of death” coverage provides financial protection for your designated beneficiaries while the cash value grows in a tax-free savings account, which pays interest at the insurer’s rate based on the policy’s value.
One generally shouldn’t buy whole life coverage just for the investment component. Nonetheless, the cash-value account is a significant benefit that can be used to cover premiums, buy more coverage, provide emergency funds, aid in estate planning or simply amass savings. (Note: Borrowing excessively against a policy’s cash value could ultimately nullify its coverage.)
Once you hit the market for permanent life insurance, you’ll find many products available. Universal life policies, for instance, offer a variable rate on the cash-value account. When interest rates are up, the cash value also rises. But, as interest rates fall, the account will earn less.
A variable universal life policy, on the other hand, typically invests in mutual funds. Again, if the fund’s investments do well, so will the cash-value account. But a drop in the stock market could put you at risk for losing coverage (if you’re relying on the cash-value account to cover the premiums) or having to pay premiums out-of-pocket.
Most Americans agree on the necessity of life insurance — 93%, according to an infographic compiled by online insurer Efinancial.com. Yet the same source points out that about half of Americans don’t have adequate coverage.
The cost of life insurance for many younger people in good health is relatively low. And the consequences of not having an adequate amount (or any at all) can be tragic.