Nobody likes to spend money on something that they hope they will never use, but life insurance is a necessity unless you have a bunch of money stashed away. Think about it, why spend money on something you hope you NEVER use? But none of us get out of here alive, so here is a case where planning for the worst is also planning for the best.
Of all the different types of life insurance, three are the most common that pay out when you die: Term life, Whole life, and Social Security. Let us describe the benefits and problems with each one:
Social Security: There is a death benefit that is paid to your spouse and children when you die. Check your annual statement to see which, if any, benefits your loved ones will receive. The benefit: You don’t have to “enroll” to get coverage and aren’t denied due to health reasons in most cases. The problems: You are paying into this program whether you want to or not. It is not flexible and you can not name the beneficiary. Oh, and nobody gets anything if you don’t have a spouse or dependent.
Whole life (also called Variable life, Universal life, and a host of other creative names): This is a policy that pays you a lump sum when you die, so long as you keep paying the premiums. You must qualify for the coverage by taking a blood test and giving your medical background. The benefit: There is a small savings plan in the policy, which you could receive if you decided to cash out and cancel the plan. The problems: The savings plan doesn’t really get started until around the 3rd year (it all goes to fees and commissions). The savings is not given to the beneficiary at death, only the coverage amount. The policy is pretty expensive when compared to Term life. (Some plans also have a penalty for cashing out and canceling the plan).
Term life: This type of insurance also pays a lump sum amount when you die, and you also must take a blood test and give your medical background information to qualify. The benefit: It is quite inexpensive compared to Whole life, about 8 to 10 times cheaper. The problems: No savings plan involved and coverage would become more expensive if you chose to continue to carry it past the term date selected when you signed up.
Weighing the pros and cons: Social Security is not a plan, it’s an expensive tax. And some would say that it might not be there when they die (see a recent article http://news.yahoo.com/s/ap/us_social_security). The savings built up in a Whole life policy is surrendered upon death and only the face value is awarded to the beneficiary. So it is my opinion that buying an inexpensive Term life policy, getting out of debt, and saving a bunch of money before the policy expires is the BEST solution for anyone.
Consider this: About 5 years ago I priced out $100,000 in Whole life. It would have cost me over $120 a month, or $1,440 a year. In 15 years I might have saved up a few thousand, but not much. $100,000 in a 15-year Term life policy cost me $35 a month, or $420 annually (or $6,300 for the full 15 years). I lost some weight, re-tested, and qualified for a better grade of coverage and the rates over the past few years have gone down. I now have $500,000 in coverage for $380 a year ($31.66 a month). Take the amount I wasn’t spending on Whole life and apply that do debt reduction, retirement, and college for my child and I will be self-insured if I die after the 15 years expires. Our 15 year mortgage will be paid off and my child will have moved out before the policy expires. My wife will be able to get along just fine without me (financially speaking).
I hear insurance prices are going up, but it is still a great time to get a reasonable amount of coverage. The younger and healthier you are, the better the rate. And to die without leaving something to your family, whether it be an insurance policy or a ton of cash, would be irresponsible. Boring yes, but a necessity.
