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.
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.
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.
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. 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.
The bank on yourself concepts right or become your own banker are built on using whole life insurance.
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.
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 use universal life as a vehicle for tax-free retirement income or just for tax-free growth. 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.
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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