For generations a debate has raged on over whether it’s best to buy whole life insurance or to buy term life insurance and “invest the difference”. Proponents of each method are adamant in their positions and both offer sound reasoning in their answers. But, for anyone to tell you which is the best for you without knowing anything about you is tantamount to someone telling you which road to take without knowing where you are going. The answer to which is best for you lies wholly within your answer to the following question: How long will I need life insurance coverage? It’s a key question that gets to the heart of the debate and why a person would use one method over the other.
Term proponents will tell you that the need for life insurance goes away once your children are grown and graduated from college, so it only makes sense to buy “pure” insurance coverage with the lowest possible outlay. Once the children are fully grown and your policy expires you’re only concern is for your retirement. It’s a simple scenario and, if it were to actually hold true for you, then, perhaps, the term life method would be the most appropriate.
Now let’s add some “what if” factors and see if, in hindsight, it was the correct decision. What if:
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What if Factors
Your spouse becomes disabled and is unable to continue to earn a full income? One of your children turns out to have some special needs that require ongoing medical care? You realize all of your dreams and amass a large amount of wealth which will be subject to substantial estate taxes when it is passed on to your heirs? You build a successful business with partners and one of them dies and you need capital in order to buy out the family members? Before you simply answer with “I’ll just buy some more insurance”, let’s add one, very critical “what if”. What if your family’s medical history caught up with you and, at some point, you become too high a risk for an insurance company to offer you a policy that you could afford or, it couldn’t offer you a policy at all.
Sound life insurance planning takes into account the unavoidable fact that “life happens” much in a way that most people can’t foresee. Should any of the “what ifs” become a reality, the need for life insurance may never go away.
In this context, here are 5 reasons why you should by a whole life insurance policy:
Irrevocable Death Benefit
As long as the premium payments, which are fixed at the time of issue, are paid, the death benefit can never be revoked even if you should become uninsurable.
The premium payments for a whole life insurance policy are level for the life of the insured. Although they are
higher than what you would pay, initially, for a term policy, they will never increase which means you can manage your future cash flow expenses with more predictability.
Guaranteed Cash Value Growth
Critics of whole life insurance point to the relatively lower yield of cash value life insurance, yet, if you were to ask someone who bought term and actually invested the difference between the years of 2007 and 2010, whether they would prefer the guaranteed gains of a whole life policy or the negative returns on their investment accounts, they might reconsider their decision.
Participating life insurers pay a portion of their profits back to the policyholder as dividends, not unlike a publicly owned company pays a stock dividend to its shareholders. Some companies have a stellar track record of paying increasing dividends each year which can greatly increase the growth of your cash value.
Lower Cost of Ownership
For the person with the planning foresight to know that the need for life insurance may never go away, whole life insurance could offer a lower cost of ownership than a term life policy, or a series of term life policies that were purchased and held for a period longer than 30 years.
In a whole life policy, your cash value accumulation is used by the life insurer to offset their risk exposure, so that, as your cash grows, the actual insurance cost of the death benefit decreases. This means that more of your level premium dollars are applied to cash value growth. Also, at some point, depending on your age, your cash value accumulation, along with the participating dividends paid to your account, could be sufficient enough to pay for the policy allowing you to stop your premium payments.
Low Cost Access to Cash Value
Whole life insurance also provides a living benefit in that your cash value is always accessible via a loan from your policy. When the emergency pops up, or your business needs capital, or you need to spring for a wedding, you simply borrow the money from yourself and, you only have yourself to repay. Any unpaid loan value would be deducted from the death benefit and you do pay a low interest charge.
For anyone considering the purchase of life insurance, playing the “what if” game is not an exercise too be taken lightly, because, after all, “what ifs” are simply unforeseen life events that happen to all of us. A whole life insurance policy protects your insurability for as long as you live and it provides a secure capital reserve to cover all of life’s contingencies. The term proponents who profess that term life insurance is cheaper probably never consider that, in your particular case, the need for life insurance may never go away.
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