Understanding Life Insurance

Published on March 17th, 2017

Life Insurance

Life Insurance is always an uncomfortable topic. People generally do not want to be reminded of their own mortality. However, the unsettling reality is that we’re all going to pass away sometime and frequently, it isn’t at a time that you have all of your affairs in order.  Not only do your loved ones have to cope with you no longer being in their lives, they will have to find a way to make do without your income and in many cases they have to come up with the funds to cover the expenses of a funeral and possible medical expenses. Without a life insurance safety net, you may be putting your loved ones in a precarious financial situation if you don’t have savings set aside to pay for these expenses.

The average funeral costs approximately $10,000. If you don’t have the savings to cover that, you may want to consider one of the many options of Life Insurance so that you have enough money to cover the funeral costs. There are many options when it comes to Life Insurance and I don’t have the space to compare and contrast all the different options.

The two most common types of life insurance are Term Life and Whole Life. As you might expect, Term Life covers the Insured for a pre-determined period (or term) of time. The term can be as little as a single year up to a maximum of 40 years. A Whole Life policy on the other hand will cover the insured for their entire life as long as the policy premiums are paid. Both types of policies will pay out the value of the policy upon the insured’s death.

So, what are the differences between the types of policies? With a term policy, if the insured does not die during the term, then the insured/beneficiary gets nothing from the insurance company. The insurance company makes money on the transaction. With a whole life policy, there is a savings component part of the policy that builds value over time. The value can be used for various things over the course of the policy life. You can borrow from the cash value, you can use the accumulated cash value to pay for the monthly premiums, etc. You can also cancel the policy and collect what’s accumulated up to that point. That’s called the surrender value of the policy.

Why would you choose one type of policy over the other? There are several reasons that are dependent upon the financial situation of the persons involved, but the primary reason is cost. Term policies are very inexpensive for the amount of insurance that you can get. Doing a little quick Googling, a $1 Million 10 year term policy can cost anywhere between $230 and $585 per year depending on your age and gender. A 30 year term policy jumps up to $514 – $1,885 per year again based on age and gender. Just a quick note of caution, rates rise considerably on both types of policies if you happen to be a smoker.
As a comparison, I personally have a type of a Whole Life policy that I took out when I was in my mid-twenties. It’s a $250,000 policy and I pay $200 a month for it. So I’m getting 25% of the coverage for approximately four times the cost. That doesn’t sound like a very good deal does it? So, why did I do it? Well, I wasn’t solely concerned with the death benefit when I purchased the policy. I was looking for a way to start saving some retirement money as well. There is an argument that can be made that it’s better to buy a Term Policy and take the difference in premium cost and invest the difference. However, that’s a choice that you have to make with your family with perhaps a financial advisor. Everybody’s situation is a little different. The right policy for you is going to be dependent on your goals, your resources and whom you’re trying to protect. You may even be in a position that you don’t need any life insurance at all.

I hope I was able to give you something to think about as far as protecting your family and a little bit of information on some of the ways that you can do that. I always love getting feedback from the readers. If you have any comments or questions, please email me at david.lukas@leydencu.org.


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