Should You Buy Whole Life Insurance?
Let’s say you’re like Courtney, and are wondering what kind of life insurance to buy. Since the annual premium for a whole life insurance policy can cost as much as 10 times that of a term policy, you need to have a very good reason for buying it.
First of all, be certain that you need life insurance. If you don’t have dependents, a spouse, or partner who would suffer financially if you died, then you may not need life insurance.
The purpose of life insurance is to make sure people who depend on you could maintain their lifestyle or reach certain goals, like going to college, if you weren’t around. For many people, buying an inexpensive, 20-year term policy is plenty of protection.
However, if you’re certain that you want one or more beneficiaries to receive a payout no matter when you die, then you need a permanent life policy. This might be critical if you have a disabled family member, for instance, who can’t earn income or requires expensive, ongoing care.
In addition to providing long-term financial security for dependents, permanent life insurance can also be part of a savvy estate planning strategy. Your heirs can use the death benefit to pay estate taxes so they’re never forced to sell off your assets to satisfy Uncle Sam. However, for 2013, you get to exclude up to $5.25 million dollars of estate tax. So this would only be a good strategy when your net worth is substantially higher than the annual exclusion. But keep in mind that the estate tax exclusion is likely to drop in the future.
To sum up, whole life insurance generally isn’t recommended for young people because it’s so expensive. You have to pay upfront fees and commissions that usually reduce your annual return on the investment part of the policy, when compared to typical market returns.
Most people are better off making low-fee investments inside a retirement account, such as a 401(k) or IRA, that can provide more growth—and buying an inexpensive term life insurance policy to protect their loved ones.
Join me for part 2 of this series, where I’ll cover what you need to know about universal and variable life insurance. They offer more flexibility and potential benefits than whole life. Once you understand the range of permanent life insurance products that are available, you’ll know if it’s the best choice for your situation.
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