Is Life Insurance Expensive?
In honor of National Life Insurance Awareness Month, I want to spend some time today talking about the different types of life insurance and a few of the different reasons why we might want to use each type.
So, you have probably heard it said that moms who drive minivans are soccer moms. That’s just one of the stereotypes we put with minivans which I said I would never own.
This summer I had to replace my Durango SUV. It got to the point where it was either spending way too much to fix it or get something new.
I like SUVs. I’ve always felt more sporty in an SUV, but looking at the options, the minivans had more of the features that I wanted.
They had more space, more flexibility for the kids, and hauling kids around. So, in the end, I decided to get a Pacifica. (It’s not a minivan despite what my sister says. 😉 It’s a Pacifica. That’s at least what I said to make myself feel better.) At least it is the sportiest version of the minivans.
Investment vehicles can also have biases or stereotypes associated with them, but sometimes we find that the features we want with a vehicle we said we wouldn’t own.
Life Insurance is one example, but despite what biases you may have, life insurance can be designed in multiple ways to meet your needs. Not all life insurance is created equal, not all investment products are created equal, but they’re all vehicles.
To decide which one works for you best you have to understand the benefits, the pros and the cons, the features of each vehicle.
When I talk about life insurance people often think of it as death insurance, you only have a benefit when you pass away.
While life insurance always has the death benefit feature, there are policies built in many different ways to have a lot of LIVING benefits too.
First, let’s go through and examine the different types of life insurance and which ones have different benefits.
There are three major types of life insurance; term life insurance, whole life insurance, and universal life insurance.
Term Life Insurance
Term life insurance is just a death benefit, there are no living benefits.
With term, you’re buying a set amount of coverage, a set amount of death benefit for a certain period of time, such as a 10 year period, 20 year period, or 30 year period. It could be used when you have young kids and want to make sure you have enough death benefit to ensure they are cared for to pay off a mortgage or a business partner, or any of those things.
Term is the cheapest type of life insurance because it does not build up any value. If you don’t die during that term (which you’re probably hoping you don’t!), then there is no benefit.
It can be a great option because the amount of coverage you can get for term life insurance is really like I said, relatively cheap and you can get a lot at times in your life when you need it, but cheapest isn’t always best, let’s keep going…
Whole Life Insurance
Whole life is exactly what it sounds like, it’s coverage for your whole life.
But the premium is for your whole life as well. A whole life plan can be designed in multiple ways as well. Sometimes they are designed for you to have the highest death benefit possible but then it takes a lot longer to build up cash accumulation in the policy. Or you can almost reverse it where you’re putting a lot to the cash accumulation and the death benefit on the other side is much lower.
If it’s structured where you’re having the cash build up first then death benefit isn’t as high as if you were to just put all that money into the death benefit, but you have more availability to use the cash for different things.
The bank on yourself concepts right or become your own banker are built on using whole life insurance.
When whole life then, is issued by mutual companies it means that in a mutual company, the policy owners are actually part of the owners in the company. The way that the policies credit interest is in the form of dividends being paid back to the owners of the mutual company, the policyholders.
There are some great features in whole life insurance for certain situations, especially when you’re looking to bank on yourself. Just remember it is for your whole life, you’re paying the premium your whole life. Sometimes the policy can pay for itself but there is always a premium cost that needs to be covered each year.
If you have a whole life policy that maybe you don’t want to pay the premiums on, then sometimes we can convert it to a paid-up policy by reducing the death benefit. Or you may be able to use the interest or the dividends to pay the premiums internally. If you have questions on this, please let us know!
Universal Life Insurance
The last one to talk about is universal life. Universal life is probably the most flexible of all the different life insurance.
You can design it around putting in a set amount of premium every year and buy the most death benefit, or you can design it to pay for only a few years and focus on building the cash benefit, or you can put in one lump sum and be done.
You can use universal life as a vehicle for tax-free retirement income or just for tax-free growth. You can design it so the death benefit can also be used for long-term care costs.
The way interest is credited is different than in the whole, you can choose a fixed, you can have a variable UL which means all the returns are based on a mutual fund type fund so that means you could go up and you could also have losses, or you can base your returns on an index. We talk about the index option a lot in the Colors of Money, so if you haven’t, check that out.
Index policies base the returns on one of the major indexes, so it’s often higher than the fixed rate while not taking the risk of the variable. If we look back historically, the returns average 6 to 7% per year.
You may think life insurance is expensive, however, the costs are different with each type of policy.
With term, you’re paying just for the death benefit, so the cost is whatever you’re paying in premiums, but for whole life or for universal it’s a little bit different because you’re building the accumulation value as well or adding other living benefits.
For example, ff you’re building like an index universal life policy for retirement income or tax-free growth, it’s usually pretty inexpensive in the long run as most of what you are putting into the plan is available and growing your cash value.
We did a whole financial power hour just recently on this which you can go back and listen to and go get in more depth information and examples of using life insurance in all the ways we have mentioned here.
If you want to learn more about indexing, stay tuned because we’re going to be talking about that next week.
And as always, let us know if you have any questions on any of this. We always appreciate your feedback!
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