A Primer on Life Insurance: Term, Whole, and Why You Need It

It’s not going to make you the most popular person at the party, but life insurance is a necessary part of adult life, and one that most of us don’t think about very often. When was the last time you did a risk management assessment to make sure that you have the right kind of insurance policies for your age and stage of life? Today there are so many different types of policies that it can be confusing, and many people find this frustrating, so they simply ignore this part of their financial life. Knowing what types of policies are available, what you need and making sure that the right insurance is in place can be a valuable part of your overall estate plan.
It’s no surprise that many Americans have chosen not to have any life insurance at all, according to NASDAQ’s recent article, “Why Have Life Insurance?” A recent study by a life insurance advocacy group, LIMRA, revealed that most Americans think that life insurance is expensive. They were asked to name the price of a 20 year, $250,000 level term life policy for a healthy 30 year old and were off by several hundred dollars. The anticipated annual cost was $400, while the real cost of such a policy is more like $150. The study found that 85% of Americans are not buying life insurance, and this price perception may be part of the problem. That’s not including the people who purchase insurance that is not right for their needs, who overpay for insurance, or those who are insured for so little that their unexpected passing will assuredly put their family’s financial future at risk.

That’s why it’s important for you to sit down annually with an insurance professional to review your policy and also to speak with your estate planning attorney about the role life insurance may play in your overall estate planning strategy. Reviewing your life insurance policies is one way to make sure you have the coverage that is right for you and your family as you age and your family situation changes.
Basic Types of Life Insurance
Finding the right policy may be easier than you think. There are really just two basic types of life insurance: term and cash value. Cash value, or “permanent,” life insurance policies offer death benefits and some investment qualities, as some of the money you spend on the policy goes into a savings program. Cash value policies have higher premiums than term policies because term life offers only death benefits during the policy term. Term can be a good option for young adults because it’s pretty inexpensive.

Term life has its drawbacks. If you outlive the term of the policy, you or your family get nothing back. Term life policies can be renewed, and some can be converted to permanent coverage.

The big question is how long do you plan to keep the policy? If you’d rather not have to pay premiums for decades, term life may be more attractive, especially if you’re just looking for a short-term hedge against the unforeseen. If you are looking at estate planning, permanent life insurance may be a better choice.

Talk with your estate planning attorney before you start spending money on a policy. He or she can help you compare term vs. permanent insurance options to help you create a strategy to make sure that your coverage adjusts over time as your family needs change.
Reference: NASDAQ (October 9, 2015) “Why Have Life Insurance?