Do You Need a Whole Life Insurance Policy?
, on July 30, 2010
Do you need a whole life insurance policy? When it comes to life insurance, most people knows very little about the subject, and the many alternatives available only add to the confusion. Typically, we don’t take enough time to sit down and understand each type of life insurance policy and which one is the best for our situation. The sad truth is that many insurance reps will start out by praising the virtues whole life insurance policy. But why?
Why Insurance Agents Love Whole Life Insurance?
Ahhh…I hate to say it, but money talks! The truth is that the whole life insurance policy is one of the highest commissioned products for an insurance representative. Since they can get more commission on a sale of whole life insurance compared to other products (for example, term life insurance), they most likely convinced themselves that whole life is the right product for everyone.
However, this doesn’t mean whole life policy is right for you!
What is a whole life insurance policy anyway?
In short, a whole life insurance policy can be summed up as:
- You pay your monthly premium.
- In return, the insurance company provides you with an amount of death benefit — let’s say $100k.
- If you die while the coverage is active, your estate or your beneficiaries will receive the $100k.
- As long as you pay your premiums on time, your coverage is active and can last your whole life (and this is why it’s called whole life insurance policy).
Now, if you want to go deeper into the product:
- Some policies allow you to stop paying premiums after a period of time, but the coverage still remains. Basically, the money you have paid into your policy now earn enough to cover future premiums without the need for you to add more fund.
- However, you may receive a call from your insurance rep after several years saying that “there is not enough money in the policy to pay the premium” and that you will have to start making payments again. Usually, this happens when the stock market goes south.
- You can use your whole life insurance policy as a tax sheltered investment.
- In addition to the death benefit, there are a ton of options, such as increasing your coverage without medical exams in the futures, borrowing against your policy, etc.
How much insurance do you need?
To answer this question, I would take a look at:
- How much debt do you owe that need to be paid off at the time of your death (such as a mortgage)?
- Do you have financial dependents that will need the equivalent of a portion of your salary to maintain their lifestyle once you are gone (e.g., kids or a spouse with a much lower or no income)?
- Do you want to leave extra money behind?
And the life insurance policy should also cover:
- Basic funeral expenses (about $15,000 to $25,000).
- Money for taxes (if you have important capital gains to declare at your death such as a rental property under your name).
- Other amount that would be required if you pass away.
Do you need a whole life insurance policy?
The key question to answer this question is to ask yourself: Will you still need this money if you pass away 15 to 20 years from now?
Here are a few things to consider:
- For a mortgage, a term insurance is a better fit as you will likely have a paid off mortgage in 25 years.
- For your kids, chances are that they won’t need your money in 10-20 years.
- For your spouse, you want to leave enough behind so that he or she can maintain the lifestyle without you.
Personally, I am not a big fan of whole life insurance; however, having coverage of $50,000 to $100,000 is a good idea (to provide liquidity and pay for funeral expenses). The rest of your insurance needs would be better served by term life insurance.
Overall, the best advice regarding life insurance I can give you is to have your insurance needs reviewed by an expert. If the recommendation is one huge whole life insurance policy, challenge him on the reasons why he offers only one product instead of a combination.
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