Life insurance is one of the most important ways you can protect your family’s financial future. In addition, life insurance is one of the most cost effective ways to protect your finances as it can be used to pay off debt, replace income, put money aside for college funds, paying for funeral costs and much more.
Who Needs Life Insurance?
If you have anyone in your life that depends on your income then you need life insurance, because life insurance is used to replace your income if it stops for you family. The most obvious person who needs a life insurance policy is the breadwinner of your family. If this income stops suddenly it is most likely that financial crisis would come after without life insurance. The last thing your family and loved ones need if you were to pass away would be the overwhelming stress and anxiety of financial ruin.
The less obvious person of the family that needs to have a life insurance policy on them is a stay at home spouse. Although no dollar income is earned if the spouse who takes care of your children and home needs brings great economic value to the family. A nanny or daycare is an extremely expensive alternative to a stay at home spouse not to mention who will keep the house clean, do the laundry, and cook while the breadwinner still continues to work.
Term and Permanent Life Insurance
There are two types of life insurance the first is term life insurance, and the second is whole life insurance which is also sometimes called permanent life insurance.
Term Life Insurance
Term life insurance provides coverage for a specified amount of time most commonly ranging between 10 and 35 years. If the person covered by the policy passes away during the time period the beneficiary of the policy receives the death benefit of the policy. Term life insurance is the recommended type of life insurance by EnviZion Insurance for a few simple reasons.
- Term life insurance is generally about 5-10% the cost of a permanent life product with the same death benefit amount. This means if you spend $100 on a whole life product you could have instead purchased a term life insurance policy (20 year term) with a death benefit between 10-20 times the death benefit.
- Term life insurance is pure insurance. This means that you only use the policy when the policy holder passes away. There is no investment feature to term life insurance like there is in permanent life insurance which is why term life insurance is so much less expensive.
- Statistics and financial reporting over time on permanent life insurance policies show that the rate of return on the investment side of the product is much less than if you were to simply take the extra money you paid for permanent life insurance products each month and invest them into a 401k or IRA.
- Permanent life insurance lasts until age 100, but life insurance is generally not needed this long. Many people argue that having a term life insurance policy is dangerous because it can expire, and leave a family without coverage but with proper planning this is not the case. Term life insurance policies most commonly range between 10 and 35 years. With the right planning when you purchase a term policy you can plan for any financial scenario including paying off a mortgage, debt, putting money aside for a college fund, annual income for your life for your family, etc. and all at a fraction of the cost of permanent life insurance.
These two videos from financial gurus Dave Ramsey and Suze Orman explains the difference between term life insurance, and also expand on some of the reasons why it is generally a better financial decision to purchase term life insurance over whole life insurance.
Dave Ramsey – “Term Life Insurance Better Than Whole Life?” https://www.youtube.com/watch?v=c4lnaZJKGvU
Suze Orman- “Term and Life Insurance Comparison” https://www.youtube.com/watch?v=AIdG7cwHo04
Permanent Life Insurance
The features of permanent life insurance include lifelong protection, an accumulating cash value and the ability to adjust your policy if needed. For each premium payment you make part of the payment goes to insuring your life, and the rest goes to building cash value.
The cash value of a permanent life insurance policy can be used accessed by taking out a loan against the cash value, take a partial withdrawal of the cash value or pay a premium payment with the cash value. However, if you take out a loan or partial withdrawal from the policy it will reduce the cash value and death benefit by the amount you take. Also, it can result in a tax liability, and it is recommended to consult a tax advisor before taking a cash withdrawal or loan against the cash value of a permanent life policy.
For the average person looking for life insurance coverage term life insurance is the best coverage for dollar spent to protect your finances. However, is important to know the different types of permanent life policies that are available to you.
- Whole life insurance is one of the most common types of permanent life insurance. In most cases, a whole life policy’s premiums and death benefit remain fixed the entire time the policy is in place. Whole life policies have a guaranteed rate of return, which means the cash value of the policy must earn a minimum amount of interest.
- Universal life has more flexibility than standard whole life policies. With universal policies you are allowed to decrease your monthly premium using the built up cash value, and you can increase the death benefit of the policy once you reach a defined amount of cash value.
- Variable universal life insurance has a variety of different investment options with the goal of increasing the cash value of the policy. However, changing the investment options can result in investment loss which can reduce the policies cash value so you must be careful in your investment decisions. Like universal life these policies allow you to adjust both the premiums and death benefit of the policy.
- Indexed universal life insurance is unique in that there is not a fixed interest rate on your cash value, and can potentially create greater gains or losses from the investments. In addition, most indexed universal life insurance policies include a guaranteed minimum interest rate.
At EnviZion Insurance we recommend speaking with one of our agents to see what life insurance option suits your specific needs. Generally, term life insurance is the best coverage for your money spent as a type of pure insurance. However, in some cases permanent life insurance can be used to meet certain specific needs of a client.
Speaking with one of our expert agents can help you find the life insurance policy that meets your needs best.