What up tho?! Today I want to address a topic that I have received a lot of questions about and is near and dear to my heart…life insurance! I get it…there’s few topics in financial planning less sexy than life insurance but I would argue it’s one of the most important. Now, I wish you all a very, very long life…but, reality is that some of us will die a premature death. With that being said, life insurance planning is important for all adults…but if you have a spouse, children, significant other and/or a very high maintenance pet, life insurance planning is a critical necessity in order to ensure that your family won’t face tremendous financial turmoil should the unthinkable occur.
Ok, so in the title of this piece I asked the question: Is your family financially prepared for your untimely death? While I can’t answer that question for you (a financial planner/representative can though), I’ll give you some things to think about when determining how much death benefit is ideal for your family situation. Additionally, we’ll look at the differences between term and whole life insurance products while analyzing some of benefits and drawbacks of both. Let’s get started!
The death benefit of your policy is the amount your beneficiary(s) would receive from your insurance company in the event of your death. So, how much death benefit does someone really need? It depends…what do you want your family to be able to do financially if you died today? Is there student loans/credit card debt? Want to pay off the mortgage? Big car loans? How about putting aside college money for the kids? How many years of income would you want to replace?
Example: You want to be able to pay of $100K in student loans, credit card and auto loan debt. You’d like to set aside $100K for each of your three kids for college. You’d like your wife to be able to pay off your $300K mortgage. You’d like to replace 10 years of your income at $80K per year. So, add that all up…and you’d need $1.5 million in death benefit to accomplish all of these objectives.
This is a cookie cutter example, but I think you can see that there are a lot of variables that can feed into the equation. You can also see how, as a military person, that SGLI alone may not be enough coverage to meet the needs of your family. Bottom line, I highly encourage you to meet with an insurance professional when determining your life insurance needs (insurance brokers get commissions from the insurance companies, not out of your pocket).
TERM VS. WHOLE
This topic can get complicated when we start looking at the myriad of different products offered in the life insurance realm. However, on the surface, the difference between term and whole life insurance is quite simple.
Term life insurance provides death benefit only and the policy accrues no cash value. The monthly payment (also known as the premium) goes up over time with most term products. Term premiums are usually very reasonable when you’re in your younger years but quickly become astronomical in your 50s, 60s and above. Also, term products only provide death benefit for the term of the policy, not for forever (in most cases). Additionally, many term policies offer the ability to convert all or part of your death benefit to whole life in the future without additional medical underwriting.
Advantages of term life is that it is affordable in your younger years. Also, if your policy is convertible, it gives you the option to convert to whole life later without a medical assessment. The primary disadvantages of term is that premiums get very expensive in later life and these policies have no cash or surrender value (so if you don’t die or you stop paying, you get nothing).
Whole life insurance provides a death benefit, just like term policies, but this death benefit is for life and the policy accrues a cash value over time. Part of your premiums with whole life policies pay for the death benefit and part goes into cash value. These policies have higher premiums in the beginning, but the premiums with whole life policies don’t go up over time. Also, whole life policies give you the ability to take out policy loans from your cash value…offering a source of funds for emergencies and grand opportunities.
The primary advantages of whole life is that premiums stay level throughout the life of the policy and that the policy accrues cash value, which you can borrow, through premium payments and dividends/market gains. Disadvantages include higher premiums and the fact that some companies offer misleading illustrations for future cash value projections.
For another perspective, here is a NY Life post comparing term and whole life.
OTHER IMPORTANT THINGS TO CONSIDER
- Whole life policies can have the cash value invested in the equities (stock) market or the money can be invested with the company and you receive dividends from the insurance company.
- You can treat your whole life policy as a source of “safe money” within your overall portfolio (if you go the dividend route from an insurance provider with an established history of paying dividends).
- Policy cash values can be an excellent source of money for emergencies and opportunities. Any “policy loan” will accrue interest that you pay back to yourself…if you choose to pay it back at all…it’s your money after all…think of it like replenishing your emergency fund if you take from it.
- Ensure you completely understand the whole life illustrations that an insurance broker will provide you. These can have lots of charts and numbers…make sure it is explained thoroughly, but understand these are projections only.
- Have a budget idea of how much you’d like to spend on your life insurance if you want to do a mixture of term and whole life. An insurance broker can build options of different policies so that you can achieve your desired death benefit while having some whole life and staying on budget (unless you’re trying to get $1M of death benefit for $30 per month…prob ain’t gonna happen playa).
- Additionally, don’t hit the easy button and just use SGLI. As I mentioned in a recent post, for most young, healthy, non-tobacco using military folk SGLI is not a good deal. Additionally, it’s likely not enough death benefit for anyone with a spouse and/or kids. Talk to an insurance professional…make sure the policy would cover a servicemember who died in combat…also, don’t cancel SGLI until your replacement policy is active.
- For most people, because of the higher cost, considering whole life doesn’t make much sense until you have completely funded your emergency cash stash, you’re maxing out any 401k matching and you’re maxing out your annual IRA contributions. Again, working with a financial planner will help you determine if a whole life policy is a good fit for your overall portfolio and life situation/goals.
In the name of transparency…
So, if you have read to this point you’re prob thinking…’tell me what you do.’ Well, I have a mixture of term and whole life policies for both my wife and I. All of our policies are with Northwestern Mutual and the whole life policies we have receive dividends from the company…our cash value is not invested in the market. We have had these policies in place for between 8-10 years…we didn’t start all of them at the same time. The projections provided when we started these policies showed the cash value equaling the total amount paid into the policy at around year 12…based on how our policies have performed thus far it appears they will be on target. I took a large policy loan about 5 years ago and took an epic Euro trip…we’ve since paid it back…I have money in my bank account within a week of the policy loan request.
NOTE: I don’t include our death benefits, total cash value or budget because those numbers will be different for everyone and everyone’s life situation drives different needs and financial planning considerations.
My attempt with this piece was to introduce the basic concepts of life insurance and the differences between term and whole life policies. Everybody has a different financial situation and there are so many different types of policies, companies and options that it can be overwhelming…that’s why, and I can’t emphasize this enough, you should absolutely talk with an insurance professional or financial planner (Dennis Lott is great…and no, he doesn’t pay me to say that). Life insurance planning is a critical piece of every person’s financial plan…especially if you have a spouse and/or children…please make sure you find an insurance professional or financial planner that you trust and find out about the products and options that will find your budget and family needs.
Life insurance planning seems complicated but it doesn’t have to be…contact an insurance professional or financial planner for assistance (hopefully I’m sounding like a broken record!). Please help me help you if you have questions or need guidance on what to do next. I’m here to help!
See ya! ‘Merica!