It’s may be hard to think about buying life insurance while the economy is struggling, unemployment is high, and wages are stagnant. But, it’s worth taking time to investigate do you need insurance and what is the right life insurance for your family. While I’m no expert, I do hope to encourage you to think about it and want to give you some food for thought as you begin making a decision.
I remember back years ago, when my husband and I were just starting out. We had children, sacrificed to save money to buy a home, and worked at getting better jobs and increasing our salaries. We had little to no information about buying life insurance, but something told us we needed it. We had a friend who sold insurance and were blindly guided by his suggestions and recommendations. Looking back, I’m not sure we made the right decision, but we invested in a whole life insurance policy.
Today, when I talk with my kids, I recommend that they look at buying term insurance, particularly since they are not wealthy and are struggling to make ends meet.
The basic difference between term and whole life insurance is this: A term policy is life coverage only. On the death of the insured it pays the face amount of the policy to the named beneficiary. You can buy term for periods of one year to 30 years. Whole life insurance, on the other hand, combines a term policy with an investment component. The investment could be in bonds and money-market instruments or stocks. The policy builds cash value that you can borrow against. The three most common types of whole life insurance are traditional whole life policies, universal and variable. With both whole life and term, you can lock in the same monthly payment over the life of the policy.
Whole life insurance is expensive: You're paying not only for insurance but also for the investment portion. That extra cost might almost be worth it if these policies were a good investment vehicle. But usually they aren't. Insurance agents like to call these policies retirement plans, emphasizing the "forced savings" inherent in forking over the premiums each month "for retirement."
Leaving aside the fact that there are many better ways to save for retirement, these policies come with high fees and commissions, which sometimes lop off as much as three percentage points from the annual return. On top of that, there are up-front (but hidden) commissions that are typically 100% of your first year's premium. Worse, it's often impossible to tell what the return on the investment will be, and how much of what you pay in goes toward the insurance and how much toward the investment.
When I look back, I wonder if our friend the insurance agent was motivated by his commission when he recommended a whole life policy. He seemed quite upset years later when we cancelled our whole life policy. I wonder if it was concern for us or knowing that his commissions from our policy would cease.Premiums for term insurance are downright cheap for people in good health up to about age 50. After that age, premiums start to get progressively more expensive. The same holds true for whole life policies, though people who need coverage starting in their 60s and beyond may have no alternative but to buy whole life. Most companies simply won't sell term policies to people over about age 65.
To get a real sense of the value of term, let's compare a term policy and a universal life policy. Say a 40-year-old nonsmoking male has a choice between a $250,000 Met Life universal policy with a $3,000 annual premium and a same amount of renewable term coverage with a 20-year fixed premium of $350.
That's not to say that whole life insurance is always a bad idea. Wealthy people can use whole life in their estate planning by setting up an insurance trust that will pay their estate taxes from the proceeds of the policy. And for the growing number of people in their late 40s or early 50s who are just starting families, whole life is at least worth a look.
One of the great problems with whole life is only an expert can tell if a policy you own or are considering will ever become a decent investment. There are many sites on the Internet with extensive information about whole life insurance as an investment. One insurance professional, who has analyzed thousands of policies, notes that whole life policies hardly ever yield a reasonable return unless held for 20 years or more. So if you are thinking of buying one, be prepared to pay into it for the very long haul.
In general, go with an insurer rated A or better; the most financially sound insurers are rated AAA, though some rating agencies use slightly different letter grades.
The premier Web site in terms of detail and ease of use, (best of all, it's free) is insure.com where you can get ratings online from Standard & Poor's as well comprehensive reports on individual insurers.
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