On radio, television, and print media there is no shortage of advertisements for life insurance products. Designed to replace the missing income a family experiences when the breadwinner dies, life insurance is sometimes marketed as “mortgage protection insurance.” It’s not really mortgage protection insurance; it’s a way for the surviving family to stay in the house, rental, or whatever living quarters they’re in without having to sell it or dip into their savings.
Term Life Insurance
The good thing about term life insurance is that it costs much less than whole life insurance. The problem with term life insurance is just like the name suggests, it terminates. Think of it as having a three-, four-, or five-year car lease. When that car lease is up, you either have to buy the car or you have to go back to the dealership and lease a new car. The same thing happens with term life insurance. When the term of the insurance is up, you can buy (extend it). However, that means you will be paying higher premiums because you are now older and if your health has taken a change for the worse, you may not qualify for the insurance.
Term life insurance is a very, very poor choice in my opinion. The policyholder pays out premiums every year and receives nothing back for them. Whole life insurance, on the other hand, is going to build cash value over the life of the policy.
Whole Life Insurance
In addition to building cash value, the other advantage of whole life insurance is that you can borrow against it at any time, once it has built up significant cash value. Note: someone with $100,000 or $250,000 of life insurance is not going to be able to borrow $100,000 in year five (5) of their policy. It should be thought of as a vehicle you can use to borrow money to cover your expenses down the road, if necessary; not as an immediate vehicle for cash. After you have had a policy for several years, the kids are grown and out of the house, and you don’t need the death benefit from the policy anymore — that is usually the best time to borrow against it. Keep in mind: the amount you borrow reduces the death benefit by the amount you borrow. If one keeps their policy for several decades, they will build up a significant cash value.
To build the cash value in a whole life policy, there are many variables to choose from including different combinations of stocks, bonds, and mutual funds that the money can go into. The options depend on the carrier. Your life insurance advisor will go over all of your choices so you can make an educated decision.
Doing it by yourself if not recommended because odds are high that you will not choose the most appropriate product for your situation. People assume that working with an agent is more expensive than doing it by themselves. You pay the same amount of premium whether you use an agent or not.
When Do I Need Life Insurance?
Once you are married, have children, or if you have other family members dependent on your income, it’s a good idea to meet with your insurance advisor about life insurance. It’s equally as important to discuss short- and long-term disability policies as the odds of being disabled for an extended period are three to four times more than the odds of dying.
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