Life insurance, in general, is not a subject many people want to talk about. After all, its more about death than it is about life. But it is a necessary part of financial planning and a form of insurance many people should have! The two main forms of life insurance are Term Life Insurance and Whole Life Insurance. Let’s take a look at them:
Term Life Insurance
Term life insurance provides death-benefit coverage for a limited period of time, the relevant term as specified in the term insurance policy (this could be 1, 5, 10, 20, or 30 years generally). The death benefit is paid out by the life insurance company only when a claim is filed if the insured dies during the term of the policy. The contract would simply expire if no death occurs by the end of the term. A term life insurance policy functions much like any other typical insurance (an event triggers payout).
Whole Life Insurance
Whole life insurance guarantees a benefit coverage for the life time of the insured (hence whole life) in the form of either an eventual death benefit or a so-called cash surrender value when the policy holder decides to cash out and effectively cancels the policy.
Term Life Insurance as a Pure Death/Risk Protection
Because a term life insurance policy only pays the claim upon the insured’s death within the stated term, a term life policy is for pure protection, as opposed to having certain savings elements in a whole life insurance policy. Term life insurance is mostly used to provide coverage of the insured’s financial responsibilities for the family, such as mortgage payments, consumer debt, child raising, college education, etc., in the event of the bread earner’s death. Term life insurance is also the most inexpensive way to obtain a substantial death coverage on a per premium dollar basis, as term insurance companies can easily collect enough premiums against few claims. It is the low likelihood of insurance companies having to pay a death benefit that makes term insurance premiums low and affordable (since term life expires, many policies expire before a claim is made).
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Whole Life Insurance as a Savings Instrument
All life insurance was originally term insurance. But because term life insurance does not pay out anything absent of a death claim and policy holders can pay premiums for 20 or 30 years and get nothing when the term expires, whole life insurance was later devised in response to the kind of upset from certain term insurance customers. However, to guarantee a death benefit for every whole life insurance, premium payments have to be much higher than those on traditional term insurance to allow a cash reserve to build up against the known, rather than the uncertain, eventual death claims. In a sense, a whole life insurance policy is transformed into a life savings mechanism, as policy holders essentially make savings contributions themselves to pay for their eventual death benefit to their beneficiaries. And as such, their account does accumulate interest over time into a cash value. But the total premiums paid can be as high as 10 times comparing to a term life insurance.
Savings in the form of overpaid premiums can be returned in a later withdrawal, should the policy holder wish to cash out the insurance policy and forgo the eventual death benefit. The non-savings part of the premiums, roughly the amount as if it were for a term life, is retained by the insurance company on the ground that the company has effectively provided a risk protection up to the point of the cash surrendering.
Whole life insurance has over time lost its popularity mostly because it’s too expensive. In fact, many financial advisers suggest a separation of life insurance from savings–buy the inexpensive term life insurance and invest the saved premiums elsewhere. Still, a whole life insurance can have its place, such as guaranteeing insurance if you believe you my have trouble getting a term plan later on in life.
Do you have life insurance? What kind of plan is it?
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I get my life insurance through my job’s group rate. They provided me a $37,000 policy and I pay $1.11 a paycheck (every 2 weeks) for an additional $60,000. That $97,000 could pay off our house, the rest of my husband’s car, and cover my cremation.
I used to have a policy through my previous employer as well with an option to up the limits. We also had long-term disability.
Generally, the policies offered through employer are convenient. However, if you are in good health it is likely much less to get your own policy. Your own policy is portable – you can take it with you when you switch employers or become ill and/oir lose your job and really need it. check sites like http://www.lifeinsurance.org for example, to get quick compare quotes.
It can also be good to check local agent to see if you can get multi policy discounts. Some companies will offer 5% off auto and home for having life policy with them. The savings can come close to paying for the policy.
Whole life insurance doesn’t always last your whole life, even with timely payments. That’s one of the great myths surrounding life insurance.
However, I think it’s better to consider what your goal with insurance is before thinking about the type of tool to fix your problem.
As you allude to here in the comments, relying on life insurance through you employer may not be your best option, especially considering the employment market right now.
Life insurance through an employer is a nice bonus but it may not cover all of your financial needs.
What’s different?
Budgeting in the Fun Stuff´s last blog ..Overlooked Costs of Home Ownership
How do you mean?
I’m thinking of two ways that you can get life insurance through an employer: where they offer it to you automatically and where you can use the company’s group rate. In the first, its more of a bonus and may satisfy your needs. In the second, you are purchasing the policy but you are getting a better rate because of the company. Here you will probably have more options to cater the policy to your specific financial needs.
If you can buy your own policy outright and they offer they types of options you need, you should compare what your employer has vs. what you can get on the open market. Then (the most important step), take action.
There are two common things to watch out for with employer policies:
1. Many life insurance policies offered through employers are yearly renewable term (YRT) policies or an older form of universal life (UL). The premiums may not be stable. After a certain point, the premiums may be unsustainable. This works to keep prices down for a short duration of employment.
2. Taking the policy with you (portability) may be too expensive. If your employer subsidized the premiums or you have to “convert” the policy to keep it beyond your employment, taking the policy with you may be more expensive than you thought.
If you’re offered some crazy-good deal on life insurance through your employer, by all means take it. But in many cases, you should treat it as gravy on top of the proper amount of coverage you already have for your family.
I’ll write about this for tomorrow. Thanks, Craig.
I’ve got a pretty sizable policy through my employer’s group rate too. It costs a fraction of price I’d pay if I bought it on my own.
Mike – Saving Money Today´s last blog ..The Movie Lover’s Guide to Saving Money
Always check with your HR to see if they have group rate offers. We got a great deal on auto insurance through my previous employer.
My wife and I have $300,000 each on a 35 year term. We were about 25 when we got it and it only costs us $50 a month. Will never increase, and will take care of all our responsibilities until we have children. At that time, we’ll add maybe $250,000 each on a 25 year term and another $250,000 on a 15year term.
You also have to factor in that that is only times our current income.
Guy G.´s last blog ..Investing Basics – Tips on Budgeting
In Australia you can have Term Life Insurance until age 99 and when you think you don’t need term life insurance anymore you just stop paying premiums…
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No need for whole life insurance at all
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