I recently received a message from a close friend’s mother. She messaged me to see if I could speak to her about life insurance.
“Jared, I really need your input. I have an insurance policy that is about to expire and I’m being told I should do a number of different things. I can’t make sense of it, and I’m just not confident in what I should do.”
When we got on the phone she told me that she had received a letter in the mail in regards to an existing policy she had.
Years ago, she had purchased a term life insurance policy and it was about to expire. She had the option to either pay much higher monthly premiums, or to let the policy lapse and then apply for new insurance.
She was getting recommendations about if she should get a new term policy, or if she should apply for whole life insurance that would never lapse.
WHICH INSURANCE IS BETTER?
One of the big debates in the personal finance world is what type of life insurance should you purchase?
There are many different companies that offer an assortment of insurance options, full of many add-ons and additional decisions to make. But the two main paths to take are either whole life (permanent) or term insurance (temporary).
The vast majority of the time, I recommend people opt to buy term life insurance.
LIFE INSURANCE IS MEANT TO BRIDGE A GAP, NOT MAKE YOUR FAMILY RICH
Let’s be very clear – the main reason most people should get life insurance is to provide financial support to their dependents if they were to pass away. It should not be seen as a way to make your kids rich after you pass away, allowing them to live a lavish lifestyle.
The duration that this support would be needed is from whenever you pass away to the point when your dependents are no longer relying on you.
If you have a young child, the idea is to be able to provide for them until they become an adult.
Also, once your children reach adulthood, the insurance is no longer needed, so you shouldn’t feel obligated to maintain it.
LIFE INSURANCE SHOULDN’T PUT A FINANCIAL STRAIN ON YOUR FAMILY
Yes, the main reason to purchase life insurance is to protect your family, but at what cost?
Like most personal finance decisions, it’s all about risk vs reward.
If you are taking out insurance it means that you aren’t willing to take on the risk that your loved ones would be in a difficult financial situation if you were to pass away. You want to eliminate, or at least, minimize that risk.
But like most decisions, there is a trade-off.
In order to pay for the insurance, you must take money away from something else.
This is completely fine, except if you’ve taken on too much insurance and it’s causing you to forego many important goals, like retirement savings.
WHY INSURANCE AGENTS PUSH WHOLE LIFE
When I was first starting in the industry I worked at an insurance company. There was a lot of discussion about helping people with their finances, protecting their families, and a number of other ways we could do good.
I recall being in training sessions and learning the details of each type of insurance.
One thing that was very clear to me was that there was a large bias toward pushing clients to purchase whole life insurance.
There were many reasons given for why this was the mentality, but it was very clear – Whole Life is the better option.
Looking back, I can think of one glaring reason why this is the case. Commissions!
Insurance agents are paid commissions to sell products, and the higher the premium, the higher their commission they earn.
Whole life insurance costs more than term. So, anytime an agent gets someone to purchase the whole life, they make more money. It’s that simple.
WHY YOU SHOULD BUY WHOLE LIFE INSURANCE
Even with that said, there are a number of reasons you should potentially purchase whole life insurance.
1 – Legacy/Gifting
If you get to a point where you have built up substantial wealth and you want to leave behind some type of legacy gift, whole life insurance can help you accomplish this.
2 – Inheritance
Once again, if you have built up wealth and want to leave behind an inheritance to your heirs, insurance can help you accomplish this.
The benefit is that you get to spend your money during your lifetime, knowing that the insurance policy will cover the inheritance.
3 – Estate Tax Planning
Since the recent tax changes, estate taxes aren’t as much of an issue as they once were. You have to possess a serious level of wealth in order for it to become an issue.
However, if you do fall into this category, life insurance can be a great way to help with paying the taxes.
4 – Insurance On Your Newborn Baby
A strategy that I see some validity behind is the ability to purchase life insurance on your newborn children.
If someone grows up and discovers they have a chronic illness, it might exempt them from qualifying for life insurance. By purchasing insurance on a baby, you can guarantee that they don’t get blocked out later in life. And you can lock in a super low premium for them.
TAKE EMOTION OUT OF THE LIFE INSURANCE DECISION
It can be really difficult choosing the best life insurance option. Not just because there are so many options to choose from, but because insurance companies lean on the fact that it’s an emotional decision.
They try to make you feel bad about not electing for the higher-cost, long-term option.
The important thing to understand is that life insurance is just another piece of a much larger puzzle – it isn’t the only piece.
You need to consider all of the other goals you have and make sure that you aren’t sacrificing too much just to get a little extra insurance; especially if it’s more than you really need.
Capably Yours,
