The topic of life insurance has always scared me. When I first graduated high school and my parents started discussing with me their life insurance plans in addition to their wills, I responded by figuratively sticking my fingers in my ears and humming to drown out the words. Now, as an older adult, I’ve had to wade into the world of life insurance plans myself, and the sheer volume of options available can leave you confused and frustrated.
The easiest way to choose life insurance plans is to figure out how each plan will affect you and your dependents. Once you understand how life insurance works, you’ll be better equipped to purchase a policy that will benefit your loved ones in the event of your passing.
Term Life Insurance
The simplest and most straight-forward life insurance plan is term life, which is a death benefit, plain and simple. You purchase a policy for a specific amount and choose the term over which you want to carry the policy. If you pass away during that period, and your policy payments are current, the amount of the plan will pay out to the beneficiary.
No complications, no complex savings plans to decipher. Term life insurance is best for low- to upper-middle-income families whose lifestyles do not lend themselves to whole life policies. The rates are cheaper and it’s easier to get approved.
According to SmartMoney.com, however, it can be difficult to take out a term life insurance plan if you are over age 50, and sometimes impossible after age 65. Insurance companies hedge their bets, so to speak, and whole life insurance might be the only option for seniors.
Whole Life Insurance
There are dozens of types of whole life insurance, with is part death benefit, part savings and investment tool. This might sound like a good combination, but the returns on investments are almost always lower than those you would find in a 401(k) or IRA, for example, and in some types of whole life insurance plans, you don’t even have any control over how those investments are distributed.
Young people with significant disposable income might benefit from whole life insurance plans. If you can find a good financial adviser who can recommend a policy that will age well over twenty or thirty years, it might be worth it. However, for most people, term life insurance is the most practical solution.
Borrowing from Life Insurance
The one main benefit of whole life insurance plans is that some of them allow you to borrow money from the reserves in certain increments. If you have sudden medical bills or are laid off, you have another source of income until you can get back on your feet.
The problem with this is that it’s just as dangerous as borrowing from your 401(k). You can end up paying double tax on the money you pay back, and you can significantly reduce the death benefit available to your dependents, should you pass while the loan is still outstanding.
Choosing Among Life Insurance Plans
If you want to purchase the right type of life insurance, a financial planner or adviser is essential. He or she should be an independent agent, not an employee of the life insurance company or even your bank, and should be experienced in helping consumers make these types of decisions.
Make sure you look at all the terms and conditions of each life insurance plan and consider how it will affect your loved ones upon your death.