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Term, Whole, or Variable Life Insurance? A Life & Death DecisionApr 27 '00 (Updated May 02 '00) Write an essay on this topic.Life Insurance is a sticky subject. It's really like making a bet that you're going to die. If you win the bet, you lose your life. If you lose the bet, you win, because you're still alive! So, the goal is to bet with money that you don't mind losing. It just so happens that I have a relative who started his own Life Insurance Company. I can remember as a youngster, someone at a family gathering asked my Uncle Herbie why he decided to focus only on life insurance and not include other kinds of insurance. "That was easy", he replied, "there's never any questions about the pay off. Either they're dead or they're not." I always remembered that. • Some Background on Life Insurance Your need for Life Insurance differs with your age, your family's needs, and your financial circumstances. If you are a young single person, you really don't have as much of a need (if any at all) for life insurance as, say, the bread winner for a family of 4 with 2 kids on the verge of going to college and a mortgage on the family home. Each person has their own unique set of life circumstances, and should evaluate their need for life insurance accordingly. I'm of the view that life insurance is just that, insurance to keep your family financially whole in the event of your death. It is insurance against a disaster, not an investment opportunity. Life Insurance companies are giant investment companies. They take the premiums and invest the money in various financial vehicles, making huge profits. Their expenses are the cost of running the business and paying off when someone, well, kicks the bucket. They have entire departments of people whose sole purpose is to determine the life expectancy rates, assuming various factors, and set the odds. The odds determine the premiums. And just like in Vegas, it's all stacked in favor of the house. • Term Insurance This is just what the name implies: life insurance for a specified period of time. This is the most inexpensive no frills option. Most term policies are renewable when the term expires for an additional term, usually ending when you reach a specified age. Of course, the older you are, the higher the cost. With each year that goes by, you become a worse bet for the house. The goal with term is to use it just for what it is, life insurance for the amount of time that you really need it. Presumably, as you go through life, your mortgage will be paid off, your kids will be through college, and you will have amassed a reasonable nest egg for retirement. At that point, your need for life insurance is highly questionable. • Whole Life Insurance This is the insurance agent's bread and butter. You're in this one for the long haul and they get paid off big time. The premiums on whole life are significantly higher than on term insurance. In fact, it may be difficult to afford the amount of coverage you really need. While the insurance company is raking in high investment profits from your premiums you will receive, in addition to life insurance coverage, a very small return on your "investment". Also, during the first few years of the policy, the returns are virtually null, and it should be noted that approximately 25% of all whole life policy holders allow their new policies to lapse within this time frame yielding huge profits for the insurance company. This is called a "surrender charge". A selling point that is used with whole life is that you build up cash value in the policy and can even borrow on it at favorable rates in the future. Yeah, well, the same goes for my 401K, only I'm making a lot more profit on my investment. Whole Life is an option for people who want no risk, low return, and total stability. If you go the whole life route, you need to be willing to shell out big bucks for the long haul and stick with it. The more prudent decision as far as I'm concerned is to buy term life for as long as you need it and invest the difference in an IRA/401K/etc. • Variable Life This is an attempt at a combo of term life insurance and a more user friendly investment strategy for the consumer than whole life. The premise is that your funds will be invested in financial vehicles with a higher rate of return, such as mutual funds. However, the cash value of this policy cannot be guaranteed due to market fluctuations. If the funds that your policy are invested in lose value, you're going to have to ante up even more money for annual premiums to make up the difference. And if you don't, your coverage will lapse. Also remember, we still have the insurance company skimming profits off the top. Variable life is the insurance company's answer to the complaint of the dismal rate of return on the whole life policies. Variable is just that, variable, and the consumer is shouldering the risk associated with higher rates of return. Again, I am left with the conclusion that it pays to purchase term insurance and invest the difference myself, where it's under my control, and bypasses the middle man. IRAs and 401Ks are tax deferred investments where you retain control and the profits are yours to keep, even if you live! :) --Things to Know-- • Insurance agents make money selling policies. They make more money selling some policies than others. It is in your best interest to study up and know the facts about the different types of insurance rather than play follow the leader with someone who may not have your best interests at heart. • It pays to be a nonsmoker. Nonsmokers live longer. You can get a discount on your premium, so don't forget to ask. • One big policy costs less than multiple little policies, so plan to put all your eggs in one basket. Just make sure it's a good basket! • Remember, the goal of the life insurance company is to make money on your money. So, they want as much of it for as long as possible. • The profit margins on term life insurance are the lowest out of all types of life insurance. That means a better buy for consumers. • On a whole life policy, the agent will typically get 1/2 of your first year's commissions as his pay. And, typically, the agent receives 10% of the commissions on your policy for the next 4 years. Cha-ching. • Beware of the agent who wants to "upgrade" or "update" your policy. If you cash out your whole life policy and start a new one, the commission starts fresh too. You might as well just write out a check to your agent and let him deposit it in his personal account. • In Conclusion This is, of course, a simplistic view of the three types of policies. There are many other types of policies available, which are variations are these three main styles. I am not an insurance professional, but my Uncle Herbie is. :) It would be wise to go on a fact finding mission of your own and seek out the type of insurance that best suits your individual needs. For me, it's term all the way. --Here are some resources to help locate good deals on life insurance policies:-- • These brokers will ask you a few questions and then search for the most inexpensive policy. The service is free (they only receive a commission if you purchase their recommendation) InsuranceQuote: 800.972.1104 SelectQuote: 800.343.1985 • If you live or work in New York, Connecticut, or Massachusetts you may be able to purchase term insurance through your local Savings Bank at a substantial discount. • This site will provide an online quote and also contains a lot of good information about insurance in general. http://www.lifeinsurance.net/ • QuickQuote will search several companies and come back with alternatives for both whole life and term life free right online. http://www.quickquote.com/lihome.html You may also be interested in this review about IRAs: • Roth IRA, Traditional IRA, 401K... which what when where how why? http://creditexpert.epinions.com/finc-review-2551-3869B5F-38C6E733-prod8  |
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