- Consumers can purchase two types of life insurance: term insurance and whole life insurance. The latter category includes all life and universal life.
- Financial advisers say term insurance is generally the best option for most people because it’s the most cost-effective.
- However, according to the American Life Insurance Companies Council, 60% of policies sold in 2021 were term policies, and 40% were term policies.
Supersizer | eplus | Getty Images
There are two broad categories of life insurance, and data shows that many households do not have the most cost-effective insurance.
According to the latest statistics, Americans will purchase 4.1 million term insurance policies in 2021, accounting for 40% of all personal insurance purchased in the same year. data From the American Life Insurance Companies Council. About 6.3 million (60%) were whole life insurance.
However, this does not appear to be in line with the general recommendations of financial advisors.
“Most people just need term insurance,” says Carolyn McClanahan, a certified financial planner based in Jacksonville, Fla. and a member of CNBC’s council of advisors.
Personal finance details:
How Many Credit Cards Should I Have? The Answer Is Not Zero
Americans Think They Will Need Nearly $1.3 Million To Retire
Republicans and Democrats split on social security reform
Life insurance is a form of financial protection that pays money to a beneficiary such as a child or spouse if the policyholder dies.
Term insurance pays a death benefit only during a specific period of time, perhaps 10, 20 or 30 years. Coverage expires after that period unless renewed.
In contrast, perpetual insurance policies, such as whole life insurance or universal whole life insurance, provide continuous coverage until the policyholder dies. It is also called cash value policy because it has an interest bearing account.
Whole life insurance is generally expensive, advisers say. Premiums are spread over a long period of time and their payments are used to cover insurance costs and accumulate cash value.
“Term insurance is probably the most cost-effective way to meet the income needs of survivors, especially minors,” said Margherita, a Gaithersburg, Md.-based CFP and member of the CNBC Advisory Council. Chen said.
Insurance premiums vary greatly from person to person. Insurance companies base premiums on the face value of the policy and the policyholder’s age, gender, health, family medical history, occupation, lifestyle and other factors.
Life Planning Partners founder McClanahan said there are three main reasons why it makes more sense to buy permanent insurance, even if it costs more. The purpose is to ensure that the insurance pays out at the time of death, no matter when the death occurs.
Some beneficiaries, such as children with special needs, for example, may need financial assistance for an extended period of time, and the policyholder’s lifetime savings may not be enough to cover their needs, McClanahan said. said.
Some policyholders may wish to leave a financial legacy to their families or charities. Additionally, some people have health problems that are relatively mild, but can get worse later on. Policyholders may not have insurance at that time, in which case it would be beneficial to purchase permanent insurance now to ensure coverage later, McClanahan said.
Most people only need term insurance.
carolyn mcclanahan
Founder of Life Planning Partners
Some shoppers buy perpetual life insurance for cash value, thinking they can borrow it or use it as a retirement savings account. But that’s a “terrifying reason” to buy permanent insurance, McClanahan said, adding that the main reason people buy insurance has always been the need for it.
One possibility is that: taxes and fines To access the cash value of insurance. Withdrawing or borrowing large sums of money from permanent insurance can accidentally expire the policy, and the owner will lose the policy.
Mr McClanahan said policyholders should rather treat cash value as the last asset someone uses, similar to home equity, as an emergency fund for the end of life.
Cheng, CEO of Blue Ocean Global Wealth, said prospective buyers should consider the “three L’s” of liability, loved ones and legacies when deciding on a life insurance policy. rice field.
For example, if you died, how much would you want to leave behind for mortgages, student loans, auto loans, etc.? Will you need money? How much would you like to leave behind for activities that are important to you?
Thinking about these questions will guide policy duration, Chen said.
Mr. Chen cited his own personal situation as an example. She purchased her 20-year term policy with a death benefit of $750,000 when all three of her children were under the age of 18. Her husband also works and has a regular income. If Ms. Chen had died prematurely, her children would have received $250,000 each for their education. She also purchased a $250,000 permanent insurance policy for Cheng’s husband to help pay off the mortgage.
According to advisers, combining term and whole life insurance offers a more cost-effective way to purchase a policy than purchasing whole life insurance alone.
Advisors say anyone who buys term life insurance should definitely buy “convertible” term life insurance. This allows policyholders to convert term insurance to permanent insurance without having to re-underwrite medical insurance after the term expires. If you are in poor health at that time, you may be denied insurance coverage.