Life Insurance
Most financial gurus recommend that you buy a cheap term life insurance policy in an amount sufficient to cover your family's needs in the event you pass away. The premiums are generally way lower than whole or permanent life insurance, at least initially, but they do go up as you age and the policy typically expires when you are around retirement age. The term policy expiration date is usually well before you are likely to pass away, so the chance of your beneficiaries receiving the death benefit is low.
The financial guru mantra is "pay less and invest the rest." While that sounds great, doing well with that strategy assumes that you actually do save and invest the difference between the whole life and term life policy, and that you are somewhat successful in that effort such that you earn a greater after-tax return than the cash surrender value that will build up in your whole life policy over time. As a practical matter, that is very difficult to do, especially if you are in a high tax bracket and you could be missing out on a great retirement and estate planning tool.
Here's a brief summary of each type of insurance:
Term Life:
Low initial cost / cheaper than whole life, but premium does go up as you get older
Buy basic coverage that you need
"Pay less and invest the rest"
Whole Life:
Level premium (never goes up), but significantly more expensive than term life
Part of premium goes to cover insurance cost and part of it builds up "cash surrender value"
Can access cash surrender value tax free, if needed, for any reason through policy loans or "partial surrender"
Policy dividends (earnings from the insurance company's general account attributable to your policy) can increase cash surrender value and / or increase death benefit and are tax-free
Unlike 401(k) and IRA accounts, there is no minimum required distribution - if you don't need the money you can just let it continue to grow and as mentioned above you can take funds out tax-free (when using a policy loan), so great for retirement planning
Continuing coverage until you pass (no expiration, "permanent")
Great wealth transfer idea, since proceeds are tax free to beneficiaries and you can't outlive permanent life insurance
I have a term life policy with Northwestern Mutual that is convertible into whole life at any time up to age 60, with no need for a physical. The annual premium has been growing steadily, which prompted me to look at it the last few years. I decided to exercise that conversion option this year to take advantage of the benefits of whole life as an investment diversification strategy and also for the estate planning and tax benefits outlined above. The first few years aren't great in terms of cash surrender value growth, but after that it grows quite nicely according to the illustration provided. The process was very simple and now I'm happy to have permanent life insurance coverage not only to protect my family now but in the future as a great generational wealth transfer tool. I believe it's important to maintain life insurance outside of your work's group term life policy. In the event you lose your job, you should have "portable" coverage, which is why I have maintained the convertible term life policy for many years.
I hope you find this post useful as you chart your personal financial course and Build a Financial Fortress in 2020. Stay safe, healthy and positive.
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