If your income is necessary to others besides yourself, life insurance is a smart choice.
If your income is necessary to others besides yourself, life insurance is a smart choice. less
In the wake of the Great Recession, many Americans struggled simply to pay the bills instead of building their nest eggs.
Now that the economy is looking up and more jobs are out there, however, people are paying closer attention to their savings and retirement plans — and that includes life insurance.
So, do you need life insurance? And if so, what features should you look for?
If you're young and single, not making all that much money, life insurance probably isn't a pressing concern. But if your income is vital to someone other than you alone — a spouse, child or even an aging parent — the sad event of your death would be an even bigger hardship once the financial impact hits home.
Almost four in 10 Americans do not have life insurance coverage, according to a late 2012 survey by industry website InsuranceQuotes.com — and of those who do have coverage, more than a third say they don't fully understand the terms of their policies.
It's time to change that if you're in one of these groups. Like disability insurance, life insurance is an easy way to protect your loved ones — and is very affordable if you're younger, in good health and opt for a simple "term" life insurance policy.
Term life insurance involves a regular premium in exchange for guaranteed benefit should you die during a set "term" — say, the next 20 years.
In the vast majority of cases, this kind of policy is best, and here's why:
• Customizable. You get a quote based on your health, the length of your term and the amount of coverage you want. This allows you to tweak your policy to best fit your personal circumstances.
• Easy comparisons. Term life is easy to compare among insurance providers because the conditions are straightforward. You have a premium, a time period and a benefit — that's it.
• Cheap and focused. Term life is simply life insurance and nothing more. This allows you to be more flexible with other financial products, shopping separately to get the best price and the best fit instead of a complicated agreement that may not be your best option and is structured
in a confusing way.
It's worth noting, however, that term life has been passed over more frequently in recent years as Americans start shopping for life insurance again. LifeHealthPro, an advisory group for the life and health insurance industry, notes that whole life insurance and universal life insurance both saw significant gains across calendar 2012 while term life sale were down.
So, how do these products differ from term life insurance policies?
"Whole life," as the name implies, lasts for the entire lifetime of the insured person instead of a set term, and grows in value over time to a final death benefit. A term life policy can leave you with nothing after 20 years of premiums (other than your health, obviously), so some like the option of cashing out a whole life policy early for a portion of the complete death benefit should they want or need the money.
Obviously, you pay a premium for this plan — and if you cash out early, you can incur high penalties and see very little money actually returned to your pocket.
Universal life is similar, but structured so that policyholders pay more than their base insurance costs in order to build up a high-interest savings or investment account. Consider this a hybrid insurance and investing plan.
But again, you can pay big fees for this kind of structure — and there's no guarantee any investments will perform well. The high costs and risks of these plans either isn't a problem or isn't fully understood by most Americans.
According to LifeHealthPro, "indexed universal life" — that is, where the extra cash is put into a stock market index like the S&P 500 — now makes up 28% of the entire life insurance market. With the S&P hitting all-time highs recently and soaring about 140% since its 2009 low, policyholders with indexed universal life are likely pretty happy.
But consider that some S&P 500 index funds from companies like Vanguard can charge as little as $2 or $3 on every $10,000 you invest … while you may pay fees and commissions as high as 100% of your first year's premium for complex insurance and investment hybrids.
Why not just get term life and invest in a mutual fund? The cost savings over the decades will add up big time.
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor's Guide to Finding Great Stocks.