Poor decisions often lead to regret and making poor financial decisions leads to regret and less money in your pocket.
When you make a rash financial decision, poorly thought through, you often kick yourself for days.
You might think the new shiny object looked really attractive in the store window, but once you exchanged money for the item, you are left dissatisfied.
Well, buying life insurance can leave that same dissatisfied feeling inside.
And what is worse is that life insurance is not a tangible thing.
Granted, you can stare at your insurance policy, but there is nothing concrete to hang onto to try and convince yourself that your purchase was worth it.
What other things do we wonder if it was worth it?
For example, I drank a $6 cup of coffee the other day. It was an amazing cup of coffee. However, if I drank that same cup of coffee everyday throughout the course of the year I would pay over $2,000 on coffee. That is not worth it, not to me.
Often people will feel buyer’s remorse when purchasing a new car or a new home. The larger ticket items are the worst. Talk about a bummer when you just put 20% down on a house that you no longer want and now feel it was not worth it.
So what is “it”?
Apparently, “it” is money.
And money is a means of exchange.
Typically, when we use money in one instance we must sacrifice a purchase in another area.
So when we ask the question, “is life insurance worth it”, we are really trying to figure out, is it worth it to buy life insurance in lieu of something else?
Flip the question around.
What if instead of asking if life insurance is worth it, we ask if our daily cup of Starbucks is worth it?
Or if our monthly cable or Netflix subscription is worth it?
Or our cell phone service?
Or our clothing budget?
And on, and on.
Trying to determine if life insurance is worth it requires that we prioritize the importance of life insurance.
We must quantify it and assign some sort of value to it to determine if it is superior to other monetary choices in our life.
But in order to gain a true estimation of the worth of life insurance, we must first understand what life insurance is, what it offers and if we should buy life insurance on our own life.
We must correctly assess its value, and in doing so, we will begin to understand how it relates to all other things we choose to spend our money on.
What is Life Insurance?
DEFINITION of Life Insurance: Life insurance is a contract between the owner and the insurer, where the insurer agrees to pay a death benefit to the beneficiary upon the death of the insured.
A policy is a contract. A contract is a policy. The two words are synonymous when it comes to life insurance.
There are four main players in this equation. There is the insurer, also known as the carrier or the life insurance company.
There is the owner of the policy, who manages the policy and controls the policy.
There is the insured, the person who the policy coverage is based on.
Finally, there is the beneficiary, the person designated to receive the death benefit proceeds.
Types of Life Insurance
The typical differentiation is usually between term life vs whole life insurance. However, there are other types of coverage available. You have the option of choosing:
- Term Life Insurance
- Whole Life Insurance
- Universal Life Insurance
- Indexed Universal Life Insurance
- Variable Universal Life Insurance
Each type of life insurance has its unique use, its own pros and cons, its own value. Its value is relative to the owner and beneficiary of the policy.
For example, a small whole life policy used for final expenses holds a small value. However, for the beneficiary who wants to provide a proper burial to the deceased loved one, that small final expense burial insurance policy is worth much.
In contrast, a $100,000 term life policy on a father of 3, who dies with little to no money in the bank and who has a lot of debt, that $100,000 is not worth as much to the family he leaves behind.
And this is part of the dilemma when trying to decide if life insurance is worth it or not. Who is to say? Who is the arbiter or final authority on the actual value of the coverage?
What Other Value Does Life Insurance Provide?
We must go further still in determining the ultimate worth of life insurance. There is the intangible value it provides.
For example, a father or mother who is the primary income earner of the household that has a large life insurance policy gets the peace of mind that the family will be taken care of financially if he or she die unexpectedly. That is worth something.
But consider the business owners who are concerned about business succession. A buy-sell funded with life insurance provides the ability for a business to continue if one of the partners dies. There is much value there.
And there is also the company wanting to protect itself with key person insurance if the company’s star employee dies. The life insurance provides the company with the needed cash to weather the storm, find a replacement and get the new employee hired.
Is Term Life Insurance Worth It?
Term life insurance lasts for a period of time. Term lengths available include:
- Annual Renewable Term
- 5 year
- 10 year
- 15 year
- 20 year
- 25 year
- 30 year
- 35 year
- 40 year
Once the term ends, you can usually renew the policy on an annual basis, but often at increasing premiums. Therefore, try and lock in for as long as possible to save yourself money down the road.
Most People Overestimate the Cost of Life Insurance
If you are like the majority of people, you overestimate what a typical term life insurance policy premium will cost. A healthy 30 year old can get a $250,000 10 year term life policy for less than $10 in monthly premiums.
That means that a small premium payment will pay your beneficiary $250,000 if you died tomorrow for $10 a month. When you look at it that way, is term life insurance worth it?
Convertible Term Life
Another factor to consider is that for anyone considering permanent coverage but maybe you cannot afford the higher premiums currently, convertible term life insurance is a great option.
With a convertible term policy, you can convert all or a portion of your death benefit to permanent coverage with no evidence of insurability, i.e. no health exam or questions.
So, you can do this even if your health deteriorates, because the company converts your policy based on the health class rating you originally qualified for.
Having said all this, we definitely do not think term life insurance is worth it for everyone.
Buy Term and Invest the Rest
Here at I&E, we are not advocates of the tired mantra of “buy term and invest the rest“.
Instead, we believe life insurance is an asset and can be used to greatly increase your financial life.
We believe (and can back it up with evidence) that a properly structured life insurance policy can produce huge benefits, both in death, and also in life. After all, it is called “life” insurance for a reason.
You see, life insurance is an asset. To clarify, permanent cash value life insurance is an asset. And it is a particularly great asset to have if you design the policy properly, with the focus on accumulating cash value.
People often wonder if it makes sense to get cash value life insurance because it costs more than term life. But with permanent coverage you build cash value that grows at true compound growth over your lifetime.
So that by the time you die your policy death benefit has actually increased to a point that you have maximized your policy’s death benefit, equating to true legacy creation.
And if you are in need of a larger death benefit initially than your budget allows, you can add a term life rider to your policy to enhance your initial death benefit.
But it will be attached to your permanent life insurance coverage that is building cash value that you can then utilize as an asset in life, not just death.
Which leads us to our next question…
Is Whole Life Insurance Worth It?
Whole life insurance in and of itself is not worth it. Your typical, run of the mill whole life policy should be avoided. However, when properly designed for cash value growth, whole life insurance can be one of the most worthwhile investments you make. Let me explain.
Whole life provides some specific guarantees that are only found in this particular type of life insurance product. Guarantees such as:
- Guaranteed Death Benefit Protection
- Guaranteed Level Premiums
- Guaranteed Cash Value Growth
Basically, you get the peace of mind knowing that your beneficiary will receive a death benefit when you die, that your life insurance premiums will never go up and that your cash value will continue to grow year in and year out.
Additionally, if your policy is a participating whole life insurance policy, the insurance company will pay you dividends.
Although not guaranteed, most participating whole life insurance policies from mutual insurance companies have paid dividends year in and year out for over a hundred years, even during the Great Depression.
You can then re-invest your dividends back into your policy through paid-up additions.
Your paid-up additions will further grow your policy’s death benefit and cash value. Overtime, your policy will be an efficient money making machine.
Your policy’s cash value is yours to use how you see fit. You can withdraw funds from your account or take out tax free life insurance loans.
The cash value in your policy is private and in many states the cash value is protected from creditors by statute.
Further, a properly designed policy, utilizing the strategy known as infinite banking, will help send your policy, and your finances, into the stratosphere.
Do yourself a favor and follow some of the links set forth in this article to learn more about why whole life insurance is worth it.
Is Universal Life Insurance Worth It?
In order to answer the question of whether or not universal life insurance is worth it or not we would have to have an understanding of your goals and objectives.
The family of universal life has several different products. There is Guaranteed Universal Life (GUL), Indexed Universal Life (IUL) and Variable Universal Life (VUL). Each product has its own pros and cons.
For example, GUL is great for estate planning with life insurance. The main reason is GUL provides maximum death benefit protection with a minimal cash value accumulation. The pro is that you pay a lower premium for permanent coverage than with other types of permanent coverage.
IUL provides index crediting based on a formula that takes into account the performance of a market index, such as the S&P 500. You can participate in the gains, up to a cap. The pro is that your losses in an IUL are limited to the floor, typically 0-1%.
VUL allows you to use your cash value to directly participate in funds invested in the market, similar to mutual funds. The pros are your potential gain is unlimited in a tax deferred environment. The con is that your potential loss is unlimited as well.
Additional Benefits of Life Insurance
Besides paying a income tax free death benefit to your beneficiary, life insurance provides several benefits to you, the owner and insured.
Life insurance provides an accelerated death benefit. If you are diagnosed terminally ill, you can access your death benefit to receive needed cash to pay for various necessities, such as home modifications, medical bills or whatever else you need or want the money for.
In addition, you can also add a long-term care rider or chronic illness rider to the policy. These riders provide cash to you if you cannot perform 2 of 6 activities of daily living. So, rather than tap into your savings, you can tap into your life insurance death benefit.
Critical illness riders are also an option, covering you if you are diagnosed with certain cancers or other sicknesses defined in the policy.
If you have a policy you no longer want you can also sell it to a life settlement company in return for a lump sum payment. You can either sell an existing permanent policy or you can convert a term insurance policy to a permanent policy.
We at I&E believe life insurance is very much worth it. The key is to gain the education needed to make an informed decision on the type of policy that is best for you before you decide to buy life insurance.
Our team of professionals,can help teach you and tailor a policy for you that meets your unique needs and objectives. Give us a call today for a complimentary consultation.