This past January we mentioned 5 Reasons you need to consider life insurance – do you have insurance on yourself or your family?
Life Insurance is perhaps one of “the” biggest foundations of personal finance. It’s also one of the biggest foundations that people often times misunderstand, too.
For most, if not every household, Life Insurance is vital. Yet when mentioned, it often leads to more lack of understanding than anything. Many people are turned off by those two words (Life Insurance), while others may just not understand the reason why it’s so important.
Yet every week we run across Go Fund Me and Car Wash requests on Facebook from families that have lost a loved one that perhaps didn’t think about the long term benefits and need to raise money for expenses during an inopportune time.
The biggest question: Do you NEED Life Insurance?
We can answer that with ONE statement: If ANYONE relies on you financially, you need life insurance.
It’s your responsibility to take care of your family – I would even go on to say, if someone relies ON you, you need life insurance. And we say this because many Stay at Home Moms assume that because they may not contribute financially, that they don’t need it. They need it JUST as much as their spouse who may be bringing in a full time income.
And the reason they NEED it is because they stay at home to care for the children. If their life is taken from them, those children need to be cared for – and it’s not a wise choice to assume that family members are going to pick up that responsibility…. nor can the working parent quit their job (after all, that’s their main income source.)
I am a huge fan of term life insurance, and I do not favor whole life or cash value life insurance at all. For most people out there today, term is their best option. There are very few people out there today that might need to even look at a whole life (permanent) life insurance policy.
There are many reasons to love Term, and if you aren’t familiar with Term Life Insurance, it can be foreign to you to even know why those reasons exist.
Term is Affordable
One of the advantages of Term Life Insurance is the price – it’s relatively low in cost compared to more permanent forms (whole life, or even cash value. Term is set for a term period (15, 20, or even 25 years) – whereas Whole Life is in place for the entire life of the beneficiary (provided they are making regular monthly, semi annual, or annual payments).
Why is Whole Life generally more? Those policies that have a cash value tied to them are usually more beceause the cash component grows in value over the life of the policy – Term is less because it doesn’t have that cash component (which might concern you but read on to find out what you can do on your own to ensure that you offset that with your own needs).
The Investment Vehicle is in Your Hands
While Whole Life generally has a cash component, Term Insurance does not. But that doesn’t mean you can’t have your own cash component to cover yourself. The intention of term insurance is to pay less for the premium, and invest the difference in your own cash vehicle.
Insurance is important for your family but it should not be your investment vehicle per se — insurance should not be used to help you earn an income. Although it’s intended to replace an income lost, that’s different than using it as an investment vehicle.
One of the best reasons to pick a term policy is to pay less in premiums for more coverage, and invest the difference in an investment vehicle where you can earn a higher rate of return over time. Though that typically does require you to have the fortitude to do that… Ta term policy is great, but you have to be disciplined enough to invest that difference on the back end (to self insure yourself later).
In most cases, the cash value portion of a cash value life insurance option is a rather low rate of return – not only could you do better in your own investment vehicle over time, you can (in most cases) beat inflation. Just as important though is keeping that money IN the investment vehicle of your choice and not being so tempted to take it out :)
Term is Basic Coverage that is Perfect for Most People
Term Insurance is relatively easy, basic coverage – no frills, not hard to understand. Cash value policies are complex — there is Whole Life, Universal Life, Variable Life, and more… not only are they hard to understand, they are (in most cases) unnecessary for most.
Provided you understand the “buy term .. invest the difference” mentality, Term provides extensive, and sufficient coverage that is more than enough for most.