You face myriad choices and terminology when you shop for life insurance: term, whole life, universal life and variable universal life, among others. Here are a few explanations and recommendations.
Term offers the most bang for their buck. These policies set a duration limit on coverage and once they expire you decide whether to renew the policy or to let the coverage end. Term is cheap, builds no cash value and often serves well if you or you and your spouse want insurance for a long time, such as 30-year term to track how long you must pay your mortgage, or until you reach retirement.
Generally, those interested in term know it runs out and hope to self-insure their death at retirement with, in theory, enough assets to support the surviving spouse. Proponents of term often buy term coverage instead of a more expensive policy, such as whole life, and invest the difference they save in premiums.
Whole life insurance, a permanent product, typically costs more than term. You get coverage for life and the policy builds cash value as you age and keep paying premiums. Whole life typically pays either a guaranteed interest rate, often 2% to 4%, or dividends based on the insurance company's investment experience.
Proponents of whole life argue that it's a forced way to save, as those that buy term and intend to invest the difference rarely do.
Polices like universal life and variable universal life offer flexibility in that you can vary the amount of premiums you pay in any given month. Variable universal life (VUL) also lets you direct investments or cash value of the policy into subaccounts in stock and bond mutual funds. In a VUL, the cash value fluctuates and interest is not guaranteed - it rises and falls according to how the underlying investments do.
From a pure investment standpoint - saving for retirement, college or plain capital growth - life insurance is the wrong tool. Accounting for the actual costs of insurance, policy fees, expense ratios of the underlying funds in variable life and variable universal life, surrender charges and agent commissions, life insurance almost always underperforms an outside, well diversified, low-cost investing strategy.
You can also withdraw and borrow from life policies - usually with stiff costs, both financial and otherwise.
As a financial planner, I believe in buying term and investing the difference. I also own whole life - not on me, on my children to protect their insurability. If any of them falls ill and becomes uninsurable, they always have their whole life policies.
Buyer beware. Several permanent policies carry hefty surrender charges , fees when you cancel a policy. If you surrender a policy in its first 10 to 15 years, you get back less than 100% of the cash value.
Permanent policies also typically pay advisors much higher commissions. Commissions run as high as 50% of the annual premium for permanent policies and about 40% for term. Ask an advisor their commission off the policy and why the advisor recommends it.
If the advisor or agent works for a parent company, ask if they can only offer their company's policies.
Shop around online or with your current auto and home agent if they offer life insurance. Often agencies and carriers discount all three policies if you keep all your insurance business under one roof.
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Sterling Raskie, MSFS, MBA, CFP, is an independent, fee-only financial planner atBlankenship Financial Planningin New Berlin, Ill. He is an adjunct professor teaching courses in math, finance, insurance and investments. His blog is Getting Your Financial Ducks in a Row, where he writes regularly about investments, retirement savings and financial planning.
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