You buy life insurance because it’s the best way to protect the ones you love. It’s a financial decision (kind of). It’s an emotional decision (sort of). It’s about love and caring for your family, and securing the future (most definitely).
Still, thousands of people don’t realize the importance of life insurance and look at it as “why pay for something I won’t benefit from”? There are different life insurance policies to choose from; some can be used as an investment account to send children to college, marry them off or be there for a rainy day. While other plans still have your traditional death benefit.
Whole life insurance policies may be the best option for you. These policies combine the traditional death benefit with a “cash value” that continually grows. Any amount within a policy’s cash value can be withdrawn at any point in your life as a loan, though there may be a minimal percentage of interest charged and a lower amount earned on the loan amount until it’s repaid. Even if you never borrow any of the funds, the policy’s death benefit increases along with the cash value, so your dependents benefit nonetheless.
Whole Life vs. Term Life
Are whole life insurance policies worthwhile as an investment vehicle? It’s indeed easy to fall for plans with investment benefits that are a lot lower than what they could be. It is crucial to be informed. Whole life insurance can cost typically way more than term life insurance. Term life offers only benefits and locked-in premiums for a particular term. You do not benefit a penny if no benefits could be claimed before your policy term concludes. On the other hand, whole life insurance has a locked-in premium for life, and the money you pay toward the policy is guaranteed to always be there for you. In some cases you can use dividends to pay for your premiums. The cash value portion can either be enjoyed now, or it will be there for dependents as an increased death benefit. It’s not a use it or lose it plan. All benefits, whether enjoyed during your lifetime or posthumously, are 100% tax-free. Perhaps most of all, purchasing a whole life policy effectively forces you to accumulate a respectable amount of savings and profit over the years, as opposed to traditional investment funds that often get lost to your latest expense. But there is one significant detail that most people are unaware of. The interest you earn is not based on your full premium. It is 8% of the portion of your premium that goes to the policy’s cash value.
A well-designed whole life policy is not a great option for virtually all people; there are exceptions. Obviously, if one cannot afford a whole policy, it would be wise to invest in a less expensive term policy to provide security for their family. Also, once you reach middle age or older, it typically makes a lot less sense to invest in a whole life policy because it takes quite a few years until a respectable profit builds up. The younger you start, the lower your premiums will be, and the more you’ll earn. In this case—when your objective isn’t savings or modest profit—it makes most financial sense to invest in a death benefit only, all the more so once the insured is no longer young.
Mark Herschlag is the founder and CEO of Cosmo Insurance Agency, which is based in Ocean County. Cosmo Insurance Agency offers personalized solutions for individuals and businesses looking to obtain health, life, dental, long term care or disability insurance.
For more information or for a free, no-obligation quote, please call (201) 817-1388 or email [email protected].