This life insurance policy sounds good, but it's not
Recently, I saw a compelling commercial for life insurance.
A woman, implying that her husband had died, says how glad she is that he purchased life insurance. His family is OK, she suggests, because he provided for them.
Turns out, though, hubby is very much alive.
His family just used his life insurance policy to help his son pay for college.
Despite the commercial's emotional pull, this type of widely available insurance -- called permanent or whole-life insurance -- isn't a good choice for most consumers. Term life insurance is a much better -- and cheaper -- option.
"Term almost always comes out on top when I explain the differences between that and permanent," says Keith Verisario, vice president of All-Security Insurance Agency in Des Plaines, Ill. "It is inexpensive and simple. The premiums don't change. It will go for the term you most need coverage for, and then it will terminate.
"If you are alive at the end of the policy," he says, "well, you just spent a minimal amount of money every year for a ton of peace of mind."
One major downside of whole-life insurance that might look great on the surface: You can benefit from it while you're alive. But that just means it might not protect you if you die.
If you tap into it, what you’re really doing is borrowing against the policy’s cash value, explains Adam Koos, founder and president of Libertas Wealth Management Group in Dublin, Ohio.
For example, if you buy permanent life insurance to cover a mortgage and you borrow against the policy before the mortgage is paid off, the policy won’t be available to help your survivors pay the mortgage if you die prematurely.
"Term insurance is best used to provide a high amount of insurance for a temporary time period," says Brian Allred, a senior agent with JMW Insurance Solutions in Cherry Valley, Calif.
"The most common situation I sell term insurance for is to cover a mortgage. For those that have a mortgage, term insurance is a great way to provide money for spouse or loved one," he says.
Higher premiums are another drawback of permanent life insurance.
Verisario says a whole-life policy can cost at least four times more for a healthy 30-year-old male than a term policy. The cost disparity grows larger with more coverage.
For example, Verisario quotes a $250,000 term policy at $228 a year; it will cost you $940 a year for a whole-life policy. At $1 million in coverage, it's $705 annually versus $3,381.
And at some point, there just isn't a need to maintain the same amount of coverage you'd want with a mortgage and a growing family.
"Life insurance is meant to replace an income stream on which others depend. Since people are expected to retire at some point and lose an income stream, there is no need for permanent life insurance," says Christian Treitler of Nosara Financial Planning in Woodcliff Lake, N.J.
Many adults buy life insurance to provide for their children. Trietler points out that as parents age, their children become adults capable of supporting themselves, eliminating the need for parents to maintain a life insurance policy to benefit them. A surviving spouse should be able to manage on retirement savings and other assets.