Q: I was convinced to purchase term life insurance about 25 years ago and have been paying monthly ever since. I realize now how much money has been thrown away by not having whole life. I am 55 and in good health. My question is am I stuck now with term, or do I have options?
A: First of all, I want to address your attitude that for the last 25 years you got nothing for your term life insurance. You, in fact, did receive a return. You purchased a peace of mind that, had you died, your dependents would have received some money to help replace your income.
Term life insurance is no different than, say, buying auto insurance. If, for 25 years, you paid for auto insurance and never had an accident, would you feel you were cheated somehow or that you were a fool?
Term life provides protection for a specific period of time, typically one to 30 years. It pays a death benefit only if you die during the term of the policy. Some policies can be automatically renewed at the end of the coverage period, and some can be converted to permanent insurance without need for a medical exam. Term allows you to buy the most insurance for the least amount of money.
Some people prefer permanent life insurance (also known by a variety of names: “whole,” “ordinary,” “universal,” “adjustable,” “variable” and as a “cash value” policy), because it builds up that cash value. While the permanent policy is in force, you can borrow against it or use the accumulated value to pay premiums. The biggest selling point of permanent life is the cash value it can accumulate.
With whole life insurance, part of your premium is used to pay for the death benefit, and the insurance company invests the rest, which is where the cash value comes from. Eventually you may be able to use some of the cash build-up to pay the insurance premium. You can also borrow against the policy.
I’m not a fan of whole life insurance. I’d rather invest separate from my life insurance. Many people who buy it don’t understand it or pay too much for it. While whole life insurance might be appropriate for some people, this type of policy can come with high fees and commissions, which directly impact the return you get on the investments within the policy.
It’s true that the older you are, the more you may pay for life insurance. If you feel you still need life insurance, don’t feel bad about continuing with term. And you can still check around for a better deal. Go to Insure.com, which provides comparative auto, life and health quotes. Insurance Information Institute‘s site also has good basic information. On the home page, click on the link for insurance topics, and then search for life insurance.
One question I would ask if I were 55: “Who am I insuring my life for?” If you no longer have any dependents relying on your income (your children are grown, for example) you may no longer need life insurance. And by “need,” I mean there isn’t anyone who would be left financially in a lurch if you passed away. You might decide you still want life insurance for your heirs or to be sure any debts are paid, but again, if no one is counting on your income to get by, you may no longer need life insurance.
Finally, remember insurance is a hedge against a future financial disaster. If the disaster doesn’t come, it may make you feel that you wasted the money, but you did get something in return. You paid for the assurance that, if something happened, you would have the money to take care of things.