Life Insurance and Its Costs
The subject of buying life insurance may not be one you want to broach, but it could be one of the most important conversations you have with your spouse or partner.
The primary reason to buy life insurance is to ensure that your loved ones are protected financially if you’re not there to support them. The good news is that one form of life insurance has become progressively cheaper over the past decade and you can get a lot more for your premium dollars. There are two basic forms of life insurance: term and whole life.
There are two basic forms of life insurance: term and whole life.
Term Life Insurance
Term insurance remains in effect for a fixed number of years. If the policyholder dies during that time, the beneficiaries collect the amount of the policy.
One of the best features of term insurance is that identical premiums can be structured throughout the term of the policy. This is known as having a “level load.” Term insurance is the least expensive type of life insurance and has been purchased by roughly 70 percent of life insurance policyholders.
“Term life is needed by anyone with dependents who would suffer financially in the event of his death,” including a spouse, a minor child or an aged parent, explains Steve Weisbart, vice president and chief economist of the Insurance Information Institute (www.iii.org).
“Even those without an income, like stay-at-home parents, should have coverage,” Weisbart adds, noting that the cost of replacing the services provided by an at-home parent ranges anywhere from $50,000 to $100,000.
If you cancel a term life policy or decide not to renew it, you receive nothing back, unless you purchase a policy with a return-of-premium guarantee. A return-of-premium option will increase the cost of the annual policy slightly, but you’ll receive a substantial portion of the premiums you’ve paid throughout the years.
The subject of buying life insurance may not be one you want to broach, but it could be one of the most important conversations you have with your spouse or partner.
Whole Life Insurance
Whole life insurance—also known as permanent, universal or universal variable life—is life insurance coverage that literally lasts for the rest of your life. It’s quite conceivable that you could buy a policy when you are 40 years old that may not pay out until 50 years later.
A chief distinction between whole and term life insurance is that whole life consists of two components: the death benefit (the insurance policy proceeds) and a “cash value” or savings portion.
Because of the added savings portion of the policy, your premium winds up being higher than the level-load premium you’d pay for term life insurance. You may also get a much smaller death benefit than with term life, although your beneficiaries will receive any cash value that has built up.
If you cancel a whole life policy, you receive only the cash-value.
If it’s more expensive and offers a smaller death benefit than term life, why buy a whole life policy?
“It’s suitable for those with disabled children who will always require financial support,” says Weisbart. “It’s also a prudent way to have funds that will be able to pay any estate taxes owed, without reducing anyone’s inheritance.”
In addition, a policyholder can borrow against the cash-value portion of the policy tax-free.
The Falling Cost of Term Life Insurance
According to Weisbart, since 2000, the cost of term life policies has dropped about 5 percent per year. As a result, premiums are less than half of what they were over a decade ago. In addition, costs are expected to drop another 4 percent for both term and whole life policies in 2007.
“People are living longer, which means insurers are paying fewer beneficiaries,” explains Weisbart. “Death rates for the 25-to-44 age group—the primary age range for purchasing life insurance—have decreased significantly over the past 10 years.”
Also, thanks to the Internet, the number of insurers has increased, and it’s easy for individuals to comparison shop and purchase insurance directly from insurance companies, instead of buying through insurance agents.
Before choosing a life insurance policy, you need to figure out how much income you’re trying to replace and how much you have to pay for life insurance coverage. Knowing those two numbers will help you figure out whether term or whole life is the right choice.
Marcy Tolkoff, JD, has been a writer and an editor for almost 20 years. Tolkoff was a staff editor at Woman’s World magazine, where she edited articles in a broad spectrum of fields over a period of 13 years, the last 6 of which were exclusively centered on personal finance. She is a member of the Society of American Business Editors and Writers and the New York Financial Writers Association.
