Tuesday, June 25, 2024
Life Insurance

Why I Think You Should Be Pretty Careful When Buying Life Insurance


Life insurance helps protect your family or loved ones against loss of income in the event of your death, ensuring that they can sustain the lifestyle you want them to after you’re gone.

Whole life insurance can also act as a wealth-building tool and an estate tax strategy. That’s because the cash value in a permanent life policy accumulates tax-free, and the death benefit is paid to the named beneficiary(s) tax-free.

That said, life insurance can be tough to navigate, and that’s why we think you should be pretty careful when buying life insurance coverage.

First, do you even need life insurance?

The benefits of life insurance may not be important to you if:

  • You don’t have a family or loved ones depending on you
  • Have got no financial obligations, like debts, or co-signed loans
  • You have invested enough for retirement
  • Your children are already grown

Who needs life insurance?

You need life insurance if:

  • You have loved ones depending on your income
  • Are debt-ridden with students loan, mortgage, auto loan, etc
  • You haven’t saved enough for retirement or children’s education
  • You are a business owner or a partner in a small business
  • A parent with a “special needs child or grandchild”
  • You want to use life insurance as an estate planning tool
  • Have a family or plans to have one in future

Should you dip a toe or go all in?

If you belong to the latter category, you need to plan carefully and decide the type of insurance you require before you jump. It’s where the debate of term vs whole life insurance comes in.

Term Life Insurance

Life insurance experts contend that term life insurance is enough for most people. You get coverage for a specific period, say 5, 10, 20, or 30 years. It comes with lower premiums for the same death benefit provided by whole life insurance.

The catch: The death benefit only pays out if you die within the covered term, otherwise, the insurance company pockets all your premiums. Doesn’t it feel like a loss? You can get around it in two ways:

  • Buy a convertible term life insurance policy: This allows you to convert your term life insurance into whole life insurance if you still need coverage at the end of the term.
  • Get in with a return of premiums rider (ROP): It may push your term life insurance premiums 30% up, but the insurer will return all or part of the premiums paid if you outlive the policy.

Whole Life Insurance

Whole or permanent life insurance covers you for life and guarantees that the death benefit will pay out indefinitely to a named beneficiary when you pass. It also acts as a form of investment and has a cash value component that accumulates a guaranteed rate of return, like 1.5% p.a.

The catch: Whole life insurance policy premiums cost six to 10x more than term life for the same death benefit. Part of the premium pays for the policy, while the rest is invested to accumulate a cash value.

So, are the costly whole life policy premiums worth it?

Well, If you are a wealthy person or have maxed out all retirement investment plans, a permanent life policy can be a worthwhile addition to your wealth-building or tax strategy.

Not only does the cash value accumulate cash-free, but your named beneficiary (s) won’t pay a dime in taxes when the death benefit pays out.

Bottom-line: is life insurance worth it?

There’s no denying that life insurance offers financial protection to loved ones at death. But it’s a complex policy that requires you to be extra careful to ensure that you get the required protection.

To determine the best life insurance policy for your situation, talk to an independent life insurance agent and compare life insurance quotes to lock in a reasonable rate.

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