Many people know they should have life insurance but many don’t know how much coverage or type of policy they should have. The is term insurance and whole life insurance.
Life insurance is important if you have a family that relies on your income. Even if one spouse doesn’t work outside of the home, it is important for them to also have life insurance. Upon their death, you would have additional expenses to hire others to do jobs that they did such as taking care of your children and home.
Term life insurance is a policy that you pay premiums for a specified term such as 20 or 30 years, and if you die within that term, the insurer pays your survivors a benefit. Permanent or whole life insurance remains in force as long as you are paying premiums. Also, some of the money you pay in premiums accumulates as a cash value. This cash value can be saved for retirement, or you can take loans against it throughout your life.
With a whole life policy, after a number of years, some of the money you have paid in is yours to keep even if you stop paying the premiums. The prospect of combining life insurance with a way to save tax-deferred money for retirement is an attraction for many people. But there are some things to consider before signing up for a whole life insurance policy.
Whole life premiums are more expensive than term insurance premiums. Once you consider the fees, whole life insurance may not be as great of a investment as it appears. Only an expert can tell if a whole life policy is a good deal.
The interest rates received on whole life insurance policies is about five or six percent before fees. Depending on the interest rates, you may be able to get better interest rates with mutual funds over the long run.
The fees and commissions on whole life policies are quite high. Some agents may push whole life policies because some agents might make 30-40 percent of a term policy’s first year premium but they may earn 80-100 percent of a whole life policy’s first year premium.
One of the exceptions where whole life insurance may be a good deal is for wealthy families in their 30s or 40s, where whole life insurance may be worthwhile as an estate planning tool. You can create an insurance trust that pays estate taxes out of the policy’s proceeds and then pass the trust onto heirs.
As with other financial matters, it is important to research whole life insurance policies before getting it to determine if it a good investment for you.