Many have heard the idea that term insurance is the only way to go. “Buy term and invest the difference” is the mantra of many financial planners and, “industry experts”. The, “buy term” marketing push has been so effective over the last 20 years that it is almost accepted as fact.
The reality is that life insurance is like everything else. You have different products available and each has its own place. My 7th grade shop teacher use to say, “Choose the right tool for the right job”. Life insurance is no different.
Here is what they do not tell you about term life insurance. When talking about an insurance policy of any kind you will have a “trigger”. The trigger is the event that has to occur in order for the insurance company to pay out. For most insurance policies the “trigger” may never occur. For example, the “trigger” for fire insurance on your homeowners policy is the destruction of your home by fire. The odds of this occurring are remote at best. The “trigger” for liability auto insurance is the injury to someone else or damage to their property that is your fault. This may happen or it may never happen. Life insurance is unlike any other type of insurance in that the “trigger” is guaranteed to happen. The only question is when.
When you buy term insurance you are insuring against you dying during the “term” agreed upon. If you are lucky enough to live longer your receive nothing. In fact, 99% of the time term life insurance companies collect your premium and pay out no death benefit. Your chances of collecting on your term life policy are small because the plans are designed that way. They are designed to collect premium when you are least likely to die. Once you have lived through the term of the policy you have 2 options. You can walk away and get nothing for the years of premium paid, or you can pay a new higher premium.
The problem here is the premiums increase so much that either you can’t afford them. For those who can afford them, the premium are so high that often they are not worth paying based on the death benefit you may receive.
Here is an example: 46 year old male gets 500K in term life with a term of 30 years. The price is $1,450/year. At the end of the 30 years our friend would have paid a total of $43,500 in premiums. He can then walk away from and receive nothing for his $43,500.
His second option is to continue buying from the insurance company. If our friend then took out another 10 years of coverage the price would go up to $10,350/year for the next ten years. The premium will continue to go up at an alarming rate until the premium is unaffordable. At that time the policy ends and our friend gets nothing. Sometime after this, it is guaranteed that he will die. His death benefit at that time will be zero.
Why then is this idea so popular? First, I believe it is easier for insurance agents to push this idea and sell term and get the sale than it is to take the time to educate the client.
What is the answer? The answer will depend on your goals. If your goal is to build up a savings reserve that is available for you in case of emergency, grow risk free, and pay a large sum if you die prior to reaching your savings goals, then you would not want a term life policy. You would want to talk to an agent about a well-designed, dividend-paying whole life policy. If designed correctly, you can grow a substantial nest egg within the policy on a tax deferred basis. If you die before you meet your savings goals the death benefit could more than make up for the benefit you would have received in a term policy, as well as the value you have built up in your policy. When you want to take money out, you have several options that, under current tax law, allow you to take the money out without tax repercussions.
It would be very difficult to build up the same nest egg elsewhere and get the same guarantees and tax advantages available in this type of policy. It is important that your plan is designed in a way that gives you maximum benefit.
If, on the other hand, you want short temporary protection for a single event and you are not concerned with building savings for retirement or for an emergency, then a term life insurance policy may help. The secret is to talk with someone who is knowledgeable regarding both types of policies.