What is Term-Life Insurance
Term Life Insurance provides a tax-free payment to your loved ones in case you die unexpectedly. Term life is easy to purchase and often very affordable. How affordable? Well, a healthy 40 year-old male can get $500,000 in term life insurance coverage for around $50 a month. The low cost of term life makes it an attractive option for younger people looking to provide protection for their families in case of an untimely death. However, there is a trade-off for the low cost of purchasing one of these policies – they expire. If you live longer than the term of your policy, you would need to purchase another policy for an additional term. The catch is, you’re now 20 years older and there is a good chance you may not be in the same health as you were when you were in your 40s.
Term Life in Your 60s, 70s, and 80s
Insurance companies are more than happy to provide hundreds of thousands of dollars in life insurance coverage to younger people because, let’s face it, they’re not likely to die. Insurance is all about statistics and the less likely you are to die, the less likely the insurance company will have to pay out large sums of money to your beneficiaries. As we age, things become a little more complicated when it comes to Term Life Insurance. In simplest terms, the older you are, the more likely you are to die and the more risk the insurance company has to take on by selling you life insurance. If you took out a 20-year term policy in your 40s, expect that same policy to cost somewhere in the neighborhood of $400 per month when you turn 60, assuming you remain healthy. If you wait until you’re 65, that number will almost double and you could be paying upwards of $700/month to keep your coverage. The rapid rise in rates when you get into your 60s, 70s and even 80s often makes term life insurance unaffordable for folks in their retirement years. The fact is, life insurance companies don’t want to insure people with a short life-expectancy. So they price their policies outside of what the average senior should be able to afford. This should tell you all you need to know about term life insurance – it provides coverage for only the most rare events that would cause an untimely death. The key word here is “untimely”. They are counting on you not dying. The odds of you dying after the age of 60 increase dramatically, and therefore, so do your insurance rates.
Is Term Life a waste of money?
Absolutely not! Life Insurance is one of the most important financial tools available to you to protect your family from the unforeseen. Nobody can predict an accident or a life-threatening medical condition. According to the Life Insurance Marketing and Research Association (LIMRA), in 2019 57% of US adults owned some form of life insurance. But that also means that 43% don’t. Look back over this past year on all of the deaths caused by this pandemic. Nobody could have seen this coming. Based on the LIMRA 2019 statistics, of the 157,000 deaths (at the time of this writing), we can estimate that 68,000 of those who have died due to COVID-19 did not have life insurance. That is a staggering number. Not only has their family lost a loved one, but their financial contribution to the household as well. Life insurance is necessary to provide your family with continued financial support after you are gone and the best time to purchase a life insurance policy is when you’re healthy. That being said, many folks aren’t fond of the idea of potentially throwing away $50 bucks a month for 20 years when they expect to live much longer than that. They are looking for a more “permanent” solution to protect their loved ones, save for retirement, pay for college, and even transfer their wealth to the next generation.
What is Permanent Life Insurance?
Permanent Life Insurance (sometimes called Whole Life or Universal Life) is similar to term life in that it provides a tax-free death benefit to your loved ones when you die. But that is where the similarities end. As the name implies, it is permanent and never expires. You are covered until the day you die at which point your family, friends, charity, or any beneficiary you choose, will receive a lump sum payment, tax-free. In addition, whole life policies build a cash value that can accrue interest over the life of the policy. This cash value can be accessed in the form of policy loans while you are still living for anything you like.
The most common use for a whole life policy (other than the death benefit) is to provide a source of income in retirement. Similar to a 401k or IRA, you can make consistent contributions to your policy throughout your working years and begin taking distributions in retirement to supplement other retirement income, such as Social Security. The main difference is that contributions to your whole life policy are made post-tax, meaning that income taxes have already been taken out so that you have satisfied the tax liability of your contributions and therefore it can never be taxed again. What that means is that your distributions are now tax-free. If you own a 401k or an IRA, you are likely familiar with the term “tax-deferred”. This basically means your 401k/IRA contributions are deductible while your distributions (withdrawals) in retirement are taxed at whatever the current income tax rates are at the time you take the distribution. We’ve all seen how fluctuations in tax rates can have a significant effect on the value of our income. The same is true with our retirement savings. This is why we often call tax-deferred the Forever Tax, you’ll always have a partner in retirement – Uncle Sam. In contrast, contributing to a whole life policy and paying the taxes on that money now means that Uncle Sam can never get his hands on your retirement savings.
Building a Strong Foundation
Retirement planning is just one feature of a whole life policy that can make it an attractive alternative to term life insurance. Consider the same 40 year-old shopping for life insurance coverage. On one hand they are healthy, fairly young and expected to live to a ripe old age. The term life company will offer him a rate that is affordable with a death benefit that should provide sufficient replacement income for his family if something were to happen. But if something doesn’t happen and he out-lives his term policy, all of that money spent was for nothing more than peace of mind.
Alternatively, instead of paying for peace of mind, let’s put that money to work for us for the same 20 year period. Remember, a whole life policy allows you to build cash value that accumulates interest at a compounding rate. If you’re not familiar with the concept and power of compounding, let me illustrate. If you set aside $100 per month every month for 20 years at a rate of return of 10% (to keep it simple), you will have accumulated $69,402.75. Not a very exciting number? Okay, how about 30 years? By saving an additional 10 years at the same rate of return, you will end up with $199,137.77. In just 10 years, you have almost tripled your money! Powerful stuff! It’s also important to note that in order to get to the $199,137.77, you only contributed a total of $36,000 over 30 years.
Now here’s something else that a term policy can’t do. Let’s say you’ve been saving inside your whole life policy for the past 15 years and you’ve built up some cash value. You can access that cash directly from the policy through loans from the insurance company. So instead of walking into your bank or credit union and paying 6% interest on a car loan, you borrow the money from yourself and pay yourself back the interest. And the best part is, as long as you are paying yourself back, your cash-value continues to accrue interest as if all of the money was still in your policy. You win twice! This simple example shows how you can open up a world of possibilities by building a strong financial foundation of your own money that is never subject to future taxes and grows at a rate that far exceeds inflation. A whole life policy isn’t just a death benefit, it’s an efficient wealth building machine that also happens to have a death benefit.
Providing protection for your family when you’re in your 20s, 30s, and 40s is essential. This is the time of life when you’re raising kids, buying a home, saving for college and the bills can really start to add up. Sometimes it can be difficult to imagine finding the extra money to set aside for tomorrow, much less 20 years down the road. While term life insurance may seem like an affordable option, I encourage you to do your homework and discuss your long-term financial goals with a financial professional that understands how to help you achieve them. There are little known strategies that can help you build a strong foundation while providing protection for your family and your hard earned money. Don’t put your money or your future at risk without getting the facts.