Bring up the subject of cash value vs. term life insurance policies over dinner with friends and you’re likely to start a heated debate or be greeted by a series of blank stares. In the discussion of life insurance after age 55, it often seems that people either have very strong ideas about the right course of action or they have avoided thinking of the topic as much as possible. Yet life insurance is a complex issue with options that can be tailored to meet many different needs.
The first step when considering life insurance is to understand the difference between term and cash value policies.
Term Life Insurance
Term life insurance is much like car or travel insurance. You pay premiums for a set period (term) and hope that you never have a reason to use it. A term policy only pays out if you die. It has no cash value, which means it cannot be borrowed against or cashed out.
Whole Life Insurance
Whole life insurance (also called permanent or universal insurance) is a cash value policy with a death benefit that never expires. You pay premiums toward the policy and it builds cash value which you can borrow against or cash out if needed. The downside to whole life is that the premiums are much more expensive than what you would pay for a term life policy.
One way to approach life insurance is to pay as little as possible for a term policy and use the money you save (by not buying whole life) to invest in an IRA which is likely to yield higher returns. This often makes sense for young people who are concerned about dying before their children are grown or have one at-home parent who would need extra financial support if their spouse should die. A 15- or 20-year term policy would provide emergency funds in the event of a tragedy.
No Life Insurance
However, older adults whose children are grown and self-sufficient do not have the same needs. Older adults have to imagine how death would impact their current finances. If both spouses are no longer working and living on stable retirement savings, there may not be much financial impact beyond the cost of funeral expenses. If life insurance is no longer needed, you may be better off saving the money that would be spent on monthly premiums.
Elements To Consider
Yet not everyone agrees with the term life approach. Some people find that cash value life insurance policies are a good addition to their overall investment portfolio. They may feel that the expensive premiums are a worthwhile investment, as the policy does have a cash value. Whole life insurance policies can be a good idea for people with substantial wealth (or a thriving business) as they do provide some estate-planning and tax advantages.
If you already own a whole life insurance policy, remember that it does have value before your death. You can cash out the policy if you decide you no longer need it, or borrow against your policy without a credit check or the approval process needed for a bank loan. The downside to borrowing is that policy loans do accumulate interest, and both the interest and principal will be deducted from your death benefits if you die before repaying in full.
Investing in life insurance is a complex process with many different options. Meeting with an insurance agent will help you understand which options are best for your financial needs. Be sure to talk to more than one agent to compare your choices and make a well-informed decision.