Guest post by Drake Richey
Drake is an advisor at Bush & Company, a boutique financial advisory firm.
Life insurance is an essential piece of the financial puzzle. The goal of life insurance is to help ensure your family or business partner would not suffer avoidable and irreversible financial harm in the event of your untimely death.
The most commonly held life insurance is “term” insurance. The premiums are structured to be paid for a specific length of time (e.g. 10, 20, 30 years). These are the policies that you may have seen advertised on TV as being low-cost, fixed-rate and guaranteed coverage offered by many different carriers.
Term Life insurance is a great way to lock in a larger death benefit during a time in life when you may be juggling a mortgage, student loans, costs associated with raising children (including college tuition) and a myriad of other expenses that can leave a younger family strapped for cash.
However, at the end of the initial level term period, the premiums increase such that they become generally unaffordable. This is where Whole Life insurance comes into play. Whole life insurance policies will pay a death benefit for your whole life, so long as the premiums are paid when due. The downside of whole life is that it is significantly more expensive than term insurance.
Here are a few of the most common questions people have about whole life insurance:
Question 1: Is temporary (term) or permanent (whole) life insurance right for me?
Term life insurance is primarily thought of as an income replacement, for both current and future lost earning potential in the event of premature death. People want life insurance during their working years, or when their kids are still dependent, and then let it expire. Conversely, whole life policies provide a guaranteed cash benefit. The “right” choice all depends on your financial priorities.
Question 2: What is the cost of whole life insurance compared to the value?
The first thing you might read as you research whole life insurance is that it is expensive. Premiums for whole life insurance are much higher than term insurance. That being said, the costs should be weighed in relation to value, and how whole life insurance fits with your entire financial portfolio. Whole life, albeit more expensive, offers two benefits that term does not: permanency and cash value.
Question 3: What does whole life cash value* mean?
In addition to a guaranteed death benefit, whole life policies have a guaranteed cash value component, which is an amount that correlates with premiums and dividends which grow over time and are available to be used by the owner while they are still alive. While projections of future cash values might depend on non-guaranteed dividends, cash value that exists in the policy does not decline as it is insulated from all market conditions. It also grows tax-deferred and is available to be used by the owner of the policy at their discretion, with very few limitations.
If cash value is used, there is an interest expense that accrues within the policy, but there is no requirement to pay the loan back. In the end, whatever you borrow will be netted out against the death benefit if the policy is in force at death. The cash value can be used for a variety of expenses, and is often used to pay for college, supplement retirement income, or start a business as Walt Disney did in 1955 when he was unable to secure a traditional bank loan to fund a pet project known today as Disneyland!
*Access to cash values through borrowing or partial surrenders will reduce the policy’s cash value and death benefit, increase the chance the policy will lapse and may result in a tax liability if the policy terminates before the death of the insured.
Question 4: Can I have both term and whole life insurance at the same time?
Most people want insurance that is guaranteed to pay out no matter when they die, yet not everybody can afford a policy that costs hundreds of dollars a month. But, there is an alternative—owning both term and whole life policies. That way, the total coverage can be “laddered,” with the term premiums and coverage ending at some point when clients are generally more financial established (after the house is paid off, in early retirement, or when kids college expenses have been met). However, you would still have the smaller whole life policy that was purchased at the same time as the term policy, except the whole life continues to have the level premium payments and growing death benefit and cash value.
There is a lot of uncertainty in our financial lives. Our jobs will change. Our income will change. Our health will change. The stock market will go up and down. Whole life insurance has built-in guarantees that can provide some insulation from these change that constantly surrounds us.
Question 5: What life insurance coverage is right for me?
Read How Much Life Insurance Do I Need to learn more about thinking through the right amount of coverage. Ultimately, I recommend speaking to a licensed financial services professional who can help guide your decision based on your current situation and future goals. There is no one size fits all answer but there are plenty of solutions!
The information provided is not written or intended as specific tax or legal advice. Our employees and representatives are not authorized to give tax or legal advice. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel.
Drake is an advisor at Bush & Company, a boutique financial advisory firm that works with individuals and closely held businesses. Bush & Company has specialties in life and disability insurance as well as broader personal and business financial planning. Following 8 years of banking and finance in New York City and 2 years working for a non-profit called FOCUS in Hartford, CT, Drake joined Bush & Company with the hope of serving the complex needs of families and businesses with a model that does not require a minimum level of assets in order to provide service. He can be contacted at 617-526-9369, or at email@example.com.