Life Insurance for Lollygaggers
Life insurance is not a topic that the vast majority of people want to think about, but it’s an essential piece of the financial planning puzzle. Purchasing a life insurance policy can significantly ease the way for your heirs. While there are umpteen types of life insurance products on the market, there is generally only one kind that I advocate, where you are not being sold something with bells and whistles that you don’t need, and that is a term life insurance policy.
What is term life insurance? Term life insurance is exactly what it sounds like, a policy that you purchase for a certain period of time, commonly 10, 15, 20 or 30 years. There are several types of term – for example where the premiums start low but increase annually (annual renewable term) or where you pay higher premiums for the chance of outliving your policy and being refunded some of the premiums at the end of the term (return premium term). But the type that I’ve found to be most appropriate for most people is level premium term, where the premiums are fixed over the life of the policy. When any of these terms expire, the policyholder can restart coverage at a higher rate or give up coverage altogether. In essence, you are renting a life insurance policy instead of owning it, meaning there are no accumulated cash benefits that need to be paid out at the end of the term.
Life insurance policies that do have the benefit of a guaranteed payout are called permanent life insurance, and this is like being a homeowner instead of a renter. Permanent life insurance comes in several basic types, whole life, universal life, and variable universal life, and all build up a cash value and last for your lifetime.
On first glance permanent life insurance sure sounds better than term life insurance. Why rent when you can build equity as an owner? Well, permanent life insurance definitely has a place in complex estate plans or charitable giving strategies, but for most of the population, term is the best option. This is because term is by far the least expensive option as you get the most death benefit per dollar paid. While term does not bank your cash in an investment account, the money that you are not spending on more expensive permanent life insurance premiums can be invested more competitively, which means you should expect higher returns. Furthermore, in most cases I think of life insurance as an income replacement strategy, and so I advise clients to match their term policies as closely as possible to their retirement dates. Once their income turns off, so does their life insurance policy. As that point, clients should have pension, portfolio, or other supplemental income to provide for their needs comfortably in retirement.
For people with children and/or mortgages, term life insurance is a necessary consideration. To throw out some ballpark numbers – if you are in your late 30s or early 40s you should be able to get a policy for between $10-80 a month that will give you between $100,000 and $1 million in coverage. That’s a small price to pay for a big relief should the need arise.