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Should You Buy Term or Cash-Value Life Insurance?
from ezinsurance.com.au:
Should you buy cash-value or term life insurance? This is a raging debate in the insurance and financial planning industries. It depends on your family´s situation and your financial needs. Do you want to make sure your dependents would not suffer financial hardship if you died — or do you want somebody to “force” you to save money?
That´s the question you must answer.
Life insurance salespeople push you to go with a cash-value policy. Good agents can certainly provide an educational service to you — but it comes at a high price.
Commissions for cash-value type life insurance policies typically run from 50 to 100% of the first year´s premiums, with 80-90% not uncommon. After the first year, the salesperson´s share of the premiums you paid goes down, but is still substantial.
On average, you can buy about eight times more life insurance coverage for each dollar of premium with term life over any cash-value insurance policy.
That means that the same premium that buys you a $100,000 whole life insurance policy will buy you a term life insurance policy of about $800,000.
If you die, that´s a huge difference for your wife/husband and children.
Life insurance salespeople will point out that you don´t get any cash value or dividends with that.
Yes, true — but you have to ask yourself whether it makes sense for you to mix up investing and life insurance.
From the standpoint of the original purpose of insurance — to replace a family breadwinner´s income — term make the more sense than whole or any other form of cash-value life insurance.
That´s because replacing a breadwinner´s income is what term insurance does. No more and no less. So that´s all you pay for.
When you buy any form of cash-value life insurance, you´re letting the life insurance company invest the money for you.
That´s what they do with your money. They invest it in the same sorts of things you should be investing in — high quality stocks and bonds. (Sometimes they invest in poor quality stocks and bonds.)
And they charge you for handling your investments for you.
You should save money and invest it wisely. Do you need a life insurance agent doing that for you? Some people do.
One argument the life insurance salespeople will make is that when your money accumulates in a cash-value life insurance policy it does so tax-free.
That´s true. But you can first of all invest your money in an IRA, Keogh account, 401(k) plan or any other tax-deferred investment available to you.
You can obtain access to an accumulated cash surrender value by borrowing on it — but they charge you annual interest. If you don´t pay it, that reduces your insurance coverage.
Another argument in favor of cash-value life insurance is that it´s permanent. Typically, you pay premiums for twenty years, and then the coverage continues until you die. The money is then paid out to the estate and is a good way for survivors to pay the estate tax.
So cash-value policies are for people who want permanent life insurance protection. Although, after they are older, the mortgage is paid off, the children are grown and self-supporting, both spouses are covered by Social Security . . . the original purpose of providing for dependents is gone.
Yet some people feel the need to continue to have life insurance coverage, especially for estate planning purposes, to help their survivors.
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