Insurance can be viewed as an umbrella that covers you and your financial world and is integral to a well thought out wealth management plan. As we are well aware, life can change rapidly affecting your goals and your whole financial situation. A solid insurance protection plan is important so you won’t have to draw down your savings or liquidate your investments should you ever find yourself in a crisis. Having the proper insurance plan in place will give you peace of mind no matter what your stage in life. There are four main categories of insurance; Life, long-term care, disability and business insurance. This article will be the first in a four-part series that will look at each of these types of insurance planning in more detail. Let’s take a look at the general category of life insurance.
Most of us are familiar with the first category, which is basic life insurance. From there it forks into what’s known as term insurance and whole life insurance. We’ll take a look at the pros and cons of each.
The difference between term and whole life insurance can be boiled down to cost and length. Term life insurance is more applicable if you have a temporary need for coverage, a more limited budget, or possibly a certain business application for it. By definition term insurance is for a limited period of time. The period is typically 10 years, but can be longer and provides a payout upon death of the insured. Term insurance almost always comes at a better price than whole life, but the downside is if you outlive the term and your coverage ends, your beneficiaries don’t receive the money. A typical scenario for using a term policy would be to buy a 20 year policy when you are a new parent, which would help provide for the child if you pass away during that period, pursuant to which the child is essentially an adult and thus the policy is no longer really needed.
Whole life insurance, on the other hand, is a permanent death benefit that also has accrued a cash value. It doesn’t expire and any cash value can be used for loans or withdrawals if needed. As a result, the cost of whole life is greater than that of term life. The policy is pretty straight forward. Premiums remain the same for as long as you live, the death benefit is guaranteed and the cash value account grows at a guaranteed rate. To give you an idea of the cost difference between the two, the following are average annual premiums for a $500,000 policy of each.
Whole life insurance is the most popular form of the permanent life insurance plans. There are a couple of other options that will give you more flexibility in regard to investing the cash value of the policy. The first of such derivatives is the Universal life policy. Like its cousin the whole life policy you receive a permanent death benefit when the insured dies, but you can choice between whether or not you want a cash value accruing with it. The cash value accumulates interest at a rate set by the insurance company. This product is typically used if the insured wants a larger death benefit in lieu of receiving the cash value component. The other subset of a whole life permanent policy is the Variable Universal life policy. This takes the cash value to another level, in that it allows the policy holder to invest in stock and bond portfolios, potentially providing the opportunity to accumulate higher cash values over the life of the policy. This of course also provides the death benefit when the insured dies.
As noted, term life insurance is less expensive and is only valid for the number of years of the policy. The permanent policies of whole life and its derivatives offer you more than just a death benefit, as they have a cash value associated with them. From a financial planning perspective you have additional options. Because the death benefit pays out regardless of when you die, you can use it as an inheritance. If you name life insurance beneficiaries on your policy, the payout will go directly to them and not through your estate. A whole life policy can be a wonderful tool to fund a trust that could be used for dependent care after your death. This can create peace of mind in knowing that someone you love will have the financial means to care for themselves in your absence. Both term and whole life insurance policies have a place in your wealth management plan depending upon your specific family needs.
