What Kind of Life Insurance Do You Need?
You have two main choices when it comes to life insurance coverage, term life insurance or cash value life insurance. How do you determine which product is best for your needs? It really depends on your life insurance coverage goals. Before you buy life insurance, you should ask yourself what you want out of your coverage. For some, the main driver might be affordability. For others, the main driver might be coverage that lasts their lifetime. The goal of this post is to get you to think about what features might be important to you when it comes to life insurance coverage and the differences between term life and cash value life insurance coverage.
Term Life Insurance – Term life insurance is meant to provide coverage for a specified term such as 10, 15, 20, 25 or 30 years. The premiums are level for the selected term but will increase substantially when the term ends, assuming you choose to keep coverage. Term life insurance provides the highest amount of protection for the lowest premium (see sample rates here). Term life insurance is an excellent product for those who want protection to last for a specific period of time such as until retirement, until their home is paid off or until their youngest child is financially independent. The low cost structure of term life insurance allows for greater savings flexibility compared to cash value life insurance.
Cash Value Life Insurance – Cash value life insurance or permanent insurance offers lifetime protection with a cash value savings component. The cash value in a permanent policy grows tax deferred and can be accessed tax free in certain instances. All of the aforementioned features come at a cost. Cash value life insurance can cost roughly 7 to 12 times more than term life insurance for the same coverage amount depending on what type of cash value product you choose.
Which Should You Choose? – Before you can decide which coverage would best meet your needs, you should ask yourself some simple questions.
Do you really need permanent coverage? – For most people the answer is no. A term policy will provide essential coverage when you are most vulnerable. This is usually when you are young, paying off your home, raising a family and saving for retirement. Once you reach retirement age, in most cases you will not need coverage. That’s not to say that there is never a need for permanent coverage. For instance, a permanent policy could be useful in if you have a child with special needs and you want to provide funds for their care after you are gone or if you have amassed a large estate and you want to provide your heirs with funds to pay estate taxes, just to name a few. If you simply have a preference for coverage that lasts your entire lifetime, you should look at the specific features of whole life, universal life and guaranteed universal life to see which product best matches your goals. Don’t let this decision delay you from buying coverage as you can always buy a term policy and convert it to permanent coverage in the future.
Is the Cash Value Component Worth it? – The thought of building cash value that grows tax deferred and can be accessed tax free might sound tempting. You should understand that it takes quite a bit of time to build substantial cash value in a permanent policy due to the upfront charges and cost of insurance. In order to reap the most from a cash value policy, you must approach it with a very long term outlook to truly maximize the cash value growth. In some cases, high earners who are phased out of Roth IRA contributions because of income limits could use life insurance as a retirement savings vehicle, but the policy should be designed in a specific way to maximize cash value growth. Read more about life insurance for retirement planning here. For most families whose income does not phase them out of contributing to a traditional or Roth IRA, buying term and investing the difference is the better choice compared to saving in an insurance policy.
Can You Afford the Higher Premiums? – As mentioned earlier, cash value life insurance costs much more than term life insurance. Obviously the difference in cost is due to the fact that cash value life insurance lasts your entire life, has some guarantees and builds cash value. You must decide if the substantially higher cost of cash value life insurance and the features associated with it are truly worth it for your particular situation. Since the coverage is meant to last your entire lifetime, you should be prepared to pay premiums for that period of time as well. It is best to talk it over with an experienced agent who can show you multiple options if you decide to use cash value life insurance.
Conclusion – If you think this post is a bit biased toward term life insurance, you’re correct. The fact is that term life insurance is an excellent solution for most families looking for affordable protection during their most financially vulnerable years. That is not to say that there is never a need for cash value coverage that lasts your entire life. If you are leaning toward cash value life insurance, make sure that you truly have a permanent need for coverage and that you understand exactly how the policy works in terms of coverage guarantees and cash value growth. We can help you decide which type of policy is best for your situation. If you need life insurance and have questions, please feel free to give us a call at (888) 687-9444 or email us at info@archstoneagency.com.
About Us
Archstone Insurance Services, LLC is an independent agency that shops over 40 of the top life insurance carriers to provide huge savings on life insurance coverage for our clients. We are happy to answer any questions you might have about any of the insurance products we offer, your planning needs or your existing coverage. Feel free to call us directly at (888) 687-9444 or email us at info@archstoneagency.com. You can also visit our website at www.archstoneinsurance.com.
