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Monday, July 27, 2020

When you need life insurance

If you’re like most, you may not need life insurance until you have kids.

After all, one of the common purposes of life insurance is, in the event of your death, to replace your income for the people who depend on it. In some cases, you may want to get life insurance for your spouse before you have kids. But there are few cases when young, single people need life insurance. Still, some insurance agents will try to sell it to you.

Read More: When should you buy life insurance?

Here is one example for when you should consider life insurance: if you’ve graduated with big student loan debts that a parent cosigned, you or your parent may want to get a life insurance policy on you to cover the balance of the loans.

In this case, opt for just enough term life insurance to cover the outstanding debt. In your early 20s, this policy should be dirt cheap. Avoid insurance products designed only to pay off your loans, and remember that you only need this insurance if your loans have cosigners. If you are the only signer on your loans and you die, a parent cannot be held legally responsible for those debts.

Read more: Get free life insurance quotes online now

What is whole life insurance?

In the world of insurance, there are two primary types of life insurance: Term life insurance, and Permanent life insurance. These are further divided into whole and universal.

Term life insurance

With term life insurance, you pay premiums for a specified term (usually 20 or 30 years), and if you die within that term, the insurer pays your survivors a benefit. But term insurance is similar to car insurance: if you stop paying premiums, you could lose your coverage just like any other policy. Only paying for a specific term period is what makes term life insurance unique.

Permanent life insurance

With permanent life insurance, your insurance remains as long as you’re paying premiums. In addition, some of the money you pay in premiums accumulates as a cash value. You can use this cash value to supplement retirement income, and even take loans against it throughout your life.

The big difference between the two types of permanent life insurance, whole life and universal life, is that whole life insurance premiums are fixed for life while universal life insurance allows you to adjust the premiums and death benefit as you go. I’ll talk about whole life insurance here, but understand that where I say “whole,” this does not necessarily apply to universal policies.

With whole life insurance, after a number of years, some of the money you’ve paid is yours to utilize—even if you stop paying premiums. This is called the policy’s cash value.

For insurers, whole life insurance can be an easy sell. Nobody likes “throwing money away” on life insurance, so the prospect of combining life insurance policies with a way to accumulate tax-deferred cash value is attractive.

One life insurance option highly attractive now is SelectMyPolicy because you can keep premiums to a minimum while also enjoying the long-term earnings. Health IQ uses your own lifestyle habits to shop trusted partners for quotes. They’ll also shop 30 additional carriers to make sure you’re getting the best rate possible.

Health IQ also doesn’t just use your lifestyle to shop quotes. Your “health literacy” also comes into play. You’ll be quizzed on your health knowledge and the score will be used to assess your own likelihood of a claim once the policy is in place.

The pros and cons of whole life insurance

Pros

  • Guaranteed (but modest) return on money
  • Fixed premiums
  • Eventually builds cash value you can borrow against or withdraw before death

Cons

  • Mediocre investment return on money
  • Expensive premiums
  • Can be complicated and difficult to understand

The biggest drawback to whole life insurance is that the premiums can be more expensive than term life insurance. Assuming equivalent investment returns, because of the way the polices are written, it takes a lot longer for a whole life policy to accumulate significant cash value (often 12-15 years) than if you invested on your own.

So for a young investor with limited free cash to buy insurance and invest for the future, this is why I only recommend term life insurance. In my opinion, it’s better to pay the cheaper premium and have savings left over to invest, use as an emergency fund, or spend as needed.

Now that the internet has made it so easy to shop for insurance, term life policies have an even bigger advantage. Using a platform like SelectMyPolicy, you can get a quote on life insurance in just a few minutes. Policies start at only $8 a month, with 10-year and 20-year terms available. If you’re looking to get a policy in place immediately, this plus the lower premium makes term life a better option.

Whole life insurance as an investment

With whole life, cash value accounts often see around 5-6% interest before fees, conventional wisdom has been that you could do better investing on your own in a mutual fund for the long run. I still think so, but the market’s current volatility understandably has some investors doubtful.

But before deciding that whole life is a good option, you have to consider the policy’s fees and commissions. By these estimates, while an agent might make 30-40% of a term policy’s first-year premium, they might earn 80-100% of a whole life policy’s first-year premium (which, remember, might have premiums that are 10 times as much as term). That’s a big incentive to avoid whole life.

Only an expert can tell if a policy is a good deal

If you’re still on the fence about a whole life policy, consider the fact that even I couldn’t look at a whole life policy and tell you if it’s a good deal. That would take a seasoned insurance pro.

The key to understanding a whole life policy is the internal rate of return— that’s the return on the policy after taking all the fees out. But it’s not like that number is printed on your policy—deducing it would take someone with know-how and some serious spreadsheets.

Also, remember that the cash value of a whole life insurance policy only begins to earn meaningful returns after you’ve held it for 20 years or more. This can be a tool insurers use to sell policies to 20-year olds (look at the money you’ll have in the bank when you’re 40!) but for savvy savers, it should be a clue that you’re saying goodbye to a lot of money for a long time.

One thing many experts will tell you is that life insurance favors younger consumers. If you strive to lead a fairly healthy lifestyle, with SelectMyPolicy you’ll be able to enjoy the lower premiums available to younger policyholders coupled with a reduced rate due to your lifestyle. Best of all, with each month, you’ll earn income on your policy.

Whole life insurance may be a good idea for wealthy, youngish families

There are no hard and fast rules about buying life insurance; every person has different considerations.

But in particular, for wealthy families in their 30s or 40s, whole life insurance can be worthwhile as an estate planning tool because you can create an insurance trust that pays estate taxes out of the policy’s proceeds and then pass the trust onto beneficiaries.

In our experience, we’ve found that estate planning raises a significant number of questions that you have to decipher. We strongly recommend getting advice from companies like Trust & Will that break it all down for you, so it’s a heck of a lot less overwhelming.

Consider term life insurance instead

Now that you know the pros and cons of whole life insurance, you may be thinking that term life insurance is best for you.

Compare Life Insurance Quotes:

Agile Life Insurance is the best option for quick, easy approvals with no medical exam required. You can lock in a rate today and adjust it in the future, even decreasing the value of the property if your needs change. Agile Life prices are competitive and you’ll pay no policy fees to ensure you get the most insurance for your premiums.

Policygenius also offers term life with no medical exam. They’ve partnered with Brighthouse SimplySelect℠ to offer low-premium coverage up to $2 million. You’ll just need to call and talk with a Policygenius representative who will walk you through a questionnaire that’ll give them some basic personal information about you. 

Another option is Bestow, which also offers competitive rates on term life policies. Bestow gathers some basic information on you and uses analytics to determine your rates. That means you can skip the medical exam and go straight to a policy. Policies range from $50,000 to $1 million. Policies offered by Bestow are provided by A+-rated insurer North American Company for Life and Health Insurance® to ensure you’re getting a company with good financial strength. 

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