Thursday, June 26, 2014

When is term life insurance a good idea vs whole life, universal life or index universal life?

Term life insurance is a good idea when looking to fill a temporary term of protection and at a cost effective premium rate that is affordable.  However, the value of term has to be taken into the context of compared to what else is available as a solution.
View this illustration in greater detail by clicking here for full size image.
For example this illustration shows the difference in costs and value between the different kinds of life insurance products available.  If you look at the cost of term life insurance over a life time for about the same amount of protection, it is expensive to keep as you get older.  A 24 year old male beginning a career may rather think to invest the difference between term coverage and universal or whole life insurance into money market funds or their employer's 401k managed plan or even the employer's stock plan.  Not a bad idea and that is indeed what many people automatically are conditioned to do, and managers encourage employees to do.  There is no shortage of financial planners or broker dealers or wealth managers who would love to invest your money, but the Wolf of Wall Street was not a science fiction movie, and Bernie Madoff was once the president of the board of directors of NASDAQ to give you an idea of why the air waves are filled with experts recommending the best way to invest your money.  I would advise that you talk to a licensed insurance professional and compare solutions, guaranteed returns and value.   Insurance professionals are required to act as your fiduciary in offering you a clear and unbiased analysis of what type of insurance product is best for your needs throughout life.  Life Insurance companies and their licensed, appointed agents are required by law to give written illustrations outlining what is guaranteed and to provide clarity. That should mean something when comparing risk.

Employer group term life insurance plans may look like a no brainer, but insurance professionals familiar with group term plans know how expensive to individuals and how profitable to insurance companies they really are over time (because there is only a 15% chance of Americans dying before the age of 70). If your HR department can provide you with an outline of how often and how much group term rates change as you age in the plan on a per unit basis of cents per thousand then compare it or have a professional insurance agent compare it for you for free.  Take a look at what happens to costs to federal employees on (FEGLI) over time.  I'd recommend selecting a non-contributory option that provides a benefit completely paid by the employer (usually one or two times salary at the most).  Any additional voluntary contribution from your pocket after that should be analyzed and compared.  For example most young employees with a family select up to 5 times salary as a default when signing up for benefits and never change it (just like federal employees who get out of it as soon as they realize how foolish it is to stay in something so expensive accumulating no cash value).  The topic is boring to most employees (young males especially - believe me, I know, I was once young once) and the impression often is that it is too complicated to understand, and most people are too busy to consider it carefully.

The sample illustration in the image shows paying up a whole life policy in full in 20 years at the time of starting a career at a much higher cost than term insurance.  Much like a mortgage payment that pays off a house and creates equity or value in the real estate as it grows, this product appreciates in value over a lifetime.  The "guaranteed" rate of return on life insurance through the products illustrated in the image is 3%.  Many insurance companies will offer competitive rates and terms.   The non-guaranteed part can range from 4.45% to 8% depending on insurance company and products offered including index funds based universal life insurance using the S&P 500, or a combination of global indexes including all three major indexes (Hang Seng Index, Euro Stock Exchange Index & S&P 500) to provide guaranteed growth and no risk of loss.   There are many financial experts who will claim that they can do better over a lifetime in managed funds, but none of them can provide a written guarantee of NO RISK of loss except an insurance company.  These Index Universal Life policies and Whole Life policies can't claim to return double digit returns like managed at risk funds, but that's just the rub.  They take the growth in the good years and bank them to hedge against losses in the down market years (like 2008 which can wipe away decades of growth in one down year).  Insurance is guaranteed as a no loss product and offers a better return than a bank's secured savings vehicle.  Insurance companies are also themselves insured much like banks to provide protection from insolvency.  Remember AIG and "too big to fail?" There's a reason almost everything in the world worth any considerable value is insured to protect against risk of loss, your life is probably one of those things your family and you would value at the top of the list.  Let a licensed insurance professional guide you through the options or call us at 301-259-1721.

1 comment:

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