Term Life Insurance vs Alternatives
“Buy term and invest the difference.” Have you ever heard that saying before? It’s actually a pretty handy way to think about investing in term life insurance. But what, exactly, does it mean? When is it a good idea? And what are the other options out there?
Different Types of Life Insurance
Term life insurance is just that, insurance that is in place for a specified term that you pre-select (10, 20, 30 years, for example). No death benefit is paid out if you don’t die during the specified term. Is that a waste of money? Actually, it’s the most economical way to insure your life. Since term insurance is only applicable for a specified time
period, it is much less expensive than other life insurance vehicles such as whole life, so that’s where the saying “buy term and invest the difference” comes into play. You would buy the less expensive term policy and invest the premium savings from not purchasing the more expensive whole-life policy.
When do people need life insurance?
Typically, people only need life insurance to replace income
during working years. In this case, getting a term policy is ideal. Additionally, many people find that they no longer have a need for life insurance once their dependents are grown, or their mortgage is paid off. On the contrary, if there is a long-term
need for a death benefit to pay out, these are common options: Whole life insurance– provides coverage for the insured’s entire life. Also, it builds up a cash value savings component. Universal life insurance
– while similar in concept to whole life insurance, it is more flexible regarding premium payments and death benefit amounts. Other existing but more uncommon alternatives are: Guaranteed issue life insurance– does not require any health questions or a medical underwriting exam. On this option premiums and death benefits are higher. Final expense insurance– a whole life insurance
product specifically designed to cover the funeral and burial expenses of the insured. Return of premium insurance–a term insurance policy that returns the premiums paid if the insured survives the term of the policy.
Which insurance do you choose?
While the majority of people will likely opt for term life insurance, it is up to you to decide which plan is right for your financial situation
. These decisions are best made with the help of a knowledgeable insurance agent. When heading into a meeting with an agent, make sure he or she is a broker who represents multiple insurance companies rather than a captive agent who only sells products from one company because you’ll need a broker who can shop for different companies to find the best plan to fit your specific needs at a reasonable price. In conclusion, no matter who you talk with, having a good grasp of the basics as outlined here can help you make an informed decision that’s right for you.
Have more questions? Contact Us
Missie Beach, CFP®, CDFA®
Senior Financial Advisor