There are two main kinds of life insurance, whole life and term, and there’s a big difference between them. Today on MoneyWise, we’ll help you determine which is right for you.
The Bible doesn’t tell you to get life insurance, but it does say in 1 Timothy 5:8, “If anyone does not provide for his relatives, and especially for members of his household, he has denied the faith and is worse than an unbeliever.”
There’s a saying that you can be “so heavenly minded that you’re no earthly good.” Unless you’re independently wealthy, you need to have life insurance to provide for your family, should something happen to you.
WHOLE LIFE vs TERM
“Term” provides coverage for a fixed amount of time, usually 10, 20, or 30 years. And it’s what you might call “pure” insurance.
Whole life and its many variations, on the other hand, doesn’t expire and it’s insurance with an investing component mixed in. It builds a cash value.
That sounds like a good thing. Who doesn’t want to build cash value? The problem is that when you combine insurance with investing, you get the worst of both worlds.
With insurance, naturally you want the most amount of coverage for the least amount of money. When you invest, you want the greatest return you can get.
But whole life policies can be 6 to 10 times more expensive than term life policies, and the cash value that grows will almost always be less than you’d get if you took the difference in price and put it into your retirement account. So you get expensive coverage and a lower return … the worst of both worlds.
To be fair, whole life policies aren’t all bad. They can be very useful in estate planning for individuals with substantial assets. But for most people, term is the way to go. Your insurance costs will be lower and your investment return greater.
Now, another nice thing about term life insurance is that if you buy it when you're young, you can usually lock in an inexpensive rate for the duration of your coverage.
Someone in good health in their 20s will probably pay around 30 or 35 dollars a month for a half-million dollar, 30-year policy.
But there are other reasons to get a term policy early. As you get older, other factors start to enter in. A family member might develop cancer, and that could affect your rate. Or you might decide to take up skydiving in your 30s. Those things will make a policy more expensive, but not if you locked in a policy back in your 20s.
It’s always best to get the longest term you can. Thirty years is great. The beneficiary is entitled to the full benefit all through that term if you should die. When the policy finally expires sometime in your 50s, your family’s need for insurance will be reduced or eliminated. Or you replace it with a new policy down the road.
And now the question, who exactly needs life insurance? Anyone whose labor would be expensive to replace. The so-called “breadwinner” who goes out and earns a salary needs to have life insurance We usually recommend the benefit be 12 to 15 times the annual salary.
But a stay-at-home spouse who cares for the kids also needs some amount of insurance because if that person dies, you’d have to pay for child care, which is expensive.
But what about children? A lot of folks take out life insurance policies on their children or grandchildren. But that actually makes no financial sense. Children rarely generate income that the family depends on, so they don’t really need life insurance.
I should mention one more thing. If your employer offers a free or inexpensive group life policy, which will almost always be a term policy, take advantage of that. But understand that you’ll probably have to supplement it with another individual policy, again term to meet your needs.
Summing up: Life insurance is biblical. Term is almost always much better than whole life, and the earlier you get it, the cheaper it is.
On this program, Rob also answers listener questions:
What is a TSP investment plan and how does it work?
When does it make sense to invest in a Roth IRA?
Is a reverse mortgage a good idea?
Should you be concerned about the government doing away with qualified retirement accounts?
How do you manage money wisely with a minimal income?
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