There aren't many subjects that stop a conversation in its tracks the way life insurance does. Talk about changing diapers, and your friends will laugh and join in with their own best stories. Talk about life insurance, and the conversation will usually grind to a sudden, uneasy halt. The unfortunate truth is that bad things do happen, and taking steps to guard against them is part of being a responsible adult. Providing adequate protection requires some understanding of the different types of insurance plans, and the advantages and disadvantages of each.
During the years when your kids are small and your responsibilities are big, term life insurance can be your best friend. If the worst should happen, providing for a young family requires a frighteningly large death benefit. However, the cost of term insurance is so low you can probably buy enough to meet your needs for less than you spend on cable and movies every month. That makes it a bargain. However, term coverage becomes increasingly expensive as you get older. It also builds no cash value, so if you get laid off and miss a few payments, your coverage will lapse.
Traditional Whole Life
Term life coverage is basic insurance, plain and simple, for a set period of time. Whole life plans cover you for life, which means every in-force policy will eventually pay out. Their costs are necessarily higher, partly for that reason and partly because they act as an investment and accumulate funds tax-free within the policy. It usually takes 20 years or more for the investment portion of a policy to start generating decent returns. However, the cash in your policy can be used to pay the premiums in hard times. The cost of whole life makes it unsuitable for the large needs and small budget of most young couples.
Traditional whole life policies are poor investment vehicles for much of their duration. Universal life policies are designed to address that problem by incorporating more conventional investment options, such as mutual funds, within the protective "wrapper" of an insurance contract. Costs are usually higher than with conventional investments, but the growth is shielded from taxation. The growth of your investments helps defray the cost of insurance, and is paid out along with the policy's death benefit. You can also borrow from the policy, making it a useful source of emergency funds.
Meeting Your Needs
You can start a good argument among insurance agents by asking them which is better: term or permanent insurance. The truth is, both types of coverage have their advantages. Nothing beats term for buying lots of coverage while you're young and need low premiums. However, if you've already topped up your IRA, a whole life or universal life policy can be a good way to fund extra tax-sheltered growth. Don't be dogmatic about term or permanent coverage. Your first responsibility is to have enough coverage to protect your family
- Hemera Technologies/AbleStock.com/Getty Images