There is a lot of confusing information out there about life insurance. Everyone has a different opinion and you may come across fancy sales pages touting the benefits of various types of policies. However, what is best for the salesperson may not be what’s best for you.
A recent quiz posted by HealthIQ found that there are many misconceptions about how to get the best value from life insurance. Let’s cut through the noise and look at how you should approach life insurance for the best long-term results.
Life insurance is an insurance product first
No one like to think about when they are going to die, but death is one of the only inevitable guarantees in life. The primary purpose of life insurance is to guarantee a cash payment to one or more beneficiaries in the event the insured passes away.
If you are a significant income earner for your family, or are a stay-at-home parent with full-time responsibility for the kids, your family would undergo a serious financial hardship in the event of your death. The loss of an income source has obvious financial ramifications. Even when a non-working spouse passes away, however, you could find yourself dealing with higher costs for childcare or even adult day care for an elderly relative.
Life insurance is designed to help alleviate those financial hardships. An appropriately valued life insurance policy can help survivors make rent or mortgage payments, put food on the table, cover burial expenses, or pay for a child’s tuition. There is no limit on how life insurance proceeds are used. The key is ensuring your family and other dependents have enough coverage in the event of a worst-case scenario.
Whole life builds value over time but is not the best way to save
In a recent quiz at HealthIQ, one question asked “What is the least effective way to save a "nest egg" for one's self or for one's children?” Only 17 percent of respondents picked the right answer: a whole life insurance policy.
Many sellers of whole life insurance policies focus on several key benefits of whole life, but don’t look at the cost of these benefits. Here are a few benefits of whole life that you may come across when shopping for life insurance:
· It grows in value over time
· There is a guaranteed payout
· Whole life is an “investment”
· You can draw on the policy value in retirement
These are all true statements to some extent. Whole life insurance policies do grow in value over time and offer a guaranteed payout, either to you or named beneficiaries. However, this is not the best route to savings.
To pay for that guaranteed value, whole life insurance policies require high monthly premiums. While you get a chunk of those back, you don’t get the entire thing. After all, insurance companies are in it to make money.
Don’t forget costs when choosing a life insurance policy
The average cost of a life insurance policy is around $500 to $1,500 per year, or $40 to $150 per month. But whole life costs a heck of a lot more than term life. I did a quick analysis on the cost of a $250,000 term life policy versus a $250,000 whole life policy and the difference is noteworthy.
For a 30-year-old buying a 30-year term policy, the cost is around $21 per month. That same person would pay $286 per month for a whole life policy. While the face values of the policy are the exact same, whole life costs more than 13 times as much per month.
You do get some value back for that extra cost, but not 13 times the value. This is why term life insurance is so popular. It is very inexpensive for a large policy value. If you are looking to protect your family at a relatively low cost, term life is the way to go. This is what I do myself. I have a $1 million term life insurance policy and pay about $72 per month.
The primary benefit is the death benefit
It should be clear at this point that life insurance is not a good “investment” to save for the future. If you really want to save and invest for retirement or otherwise, your 401(k), IRA, or other tax advantaged savings plan is always the best option.
In the same quiz, HealthIQ asked test takers “What is the primary benefit of buying life insurance, even when buying life insurance for children?” Less than half of respondents got this one right. Just 44 percent picked “death benefit” from the list of options.
Let’s make this very clear so you never have any doubt: life insurance is all about the death benefit. That is the primary focus of any life insurance policy.
If you think you know all there is to know about life insurance, put your skills to the test. You can take the same quiz, Life Insurance: Picking the Right Policy for Your Kids, or alternatively take a look at the quiz on Life Insurance Quirks You Should Know About.
Life insurance is an important part of your personal finances and vital to protecting your family if anything ever happens to you. Don’t ignore or waste money on a bad policy. Pick a policy that meets your family’s needs to get the best value from life insurance.