There are two basic types of life insurance: term and whole life. Whole life insurance has long been promoted as the best option for investing and saving, but savvy financial advisors are now pointing out that term life insurance is actually the better value. Take a closer look at how these two options really work and you’ll see why term life insurance policies are the smartest move for your financial health.
The Purpose of Life Insurance
It’s important to know your purpose for purchasing life insurance before you begin shopping. Whole life insurance policies are often promoted as savings and investment tools. However, this approach focuses more on the monetary gains of the plan than the plan’s primary purpose, which is providing financial protection for your family in the event of your passing.
If you look at life insurance as simply a way to replace lost income after your death, you may see your options in a very different light. If you’re the primary bread-winner in your household, your life insurance will keep things going after your death and help your family deal with expenses associated with your funeral and other arrangements. Look for a life insurance plan that best meets your family’s needs as a replacement for the money that you would normally bring in.
If you’re interested in adding new savings and investment strategies to your financial portfolio, you have many options to consider aside from a life insurance plan, as you’ll see.
How Term Life Insurance Works With Your Lifestyle
Term life insurance policies are only good for a set amount of time. Most people expect to outlive their plan entirely. Since you’ll need to renew your term life insurance several times throughout your lifetime, you’ll have many opportunities to adjust the plan to meet your changing needs. After all, you need more coverage when you’re supporting a young family than you do when you’re only supporting your spouse.
After you retire, your life insurance needs will change drastically. By this point in your life, your children will probably be supporting themselves and you won’t have an income to replace anymore. With term life insurance, you can reevaluate your situation at the end of each term and make sure you’re always carrying an appropriate amount of coverage for your needs and lifestyle.
How Term Life Insurance Helps You Save
Your financial goals should include paying off debt, building an emergency fund, and investing in your retirement. If you invest in an expensive whole life insurance plan, you’re not supporting these goals very effectively. The plan may yield a small return, but this will take years to realize. You will also pay steep expenses and commissions. For the first three years of the plan, you won’t earn any returns at all as these fees are paid off.
In an example from CNN Money, a 40-year-old man might pay $350 a year for a 20-year term life insurance policy with a $500,000 benefit, or $3,000 a year for a whole life policy with the same benefit. If you choose term insurance over whole life, you free up $2,650 a year. If you poured this into the average household credit card debt of $15,252, you’d become debt-free in less than six years.
In less than six months, you could build up an emergency fund of $1,000 or more. After that, you could invest your $2,650 in a variety of stocks and bonds. By keeping the money in your own hands, you’re able to meet all your financial goals in under a decade.
How to Make it Work
The New York Daily News highlighted just this strategy in a recent article on the pros of term life insurance. It’s clear that you can do a lot more with the extra money securely in your control. However, you’ll quickly find that these outstanding financial results won’t just happen on their own. The lure of a whole life insurance policy is that your money compounds for you with minimal involvement. Once you’ve paid your premium, the rest is taken care of.
If you want to reap all the benefits of saving money with a term life insurance policy, you must commit to making the most of the difference between the two plans. Shop around for both term and whole life insurance policies. Make a note of the difference in the premiums. Every case is different, so your own savings might be more or less than the example given.
Commit to making smart financial moves with the money you’re saving on the term life insurance policy. If you spend the extra cash frivolously, you may enjoy your life more, but you won’t make real progress toward your financial goals. Use this as an opportunity to set aside a large chunk of cash each month to reduce your debt, build your savings, and create a well-rounded financial portfolio.
Finding Great Financial Advice
As you’re shopping for life insurance, you’ll probably come into contact with several insurance brokers. They may advise you to invest in a whole life plan. If this sounds appealing, you can certainly stop and do the math for yourself on how the specific plan will impact your financial situation.
If you’re unsure about which plan to choose, make a list of your financial goals. Write down exactly how much debt you have, including student loans, car loans, and a home mortgage. Determine how much you need to invest to save for a comfortable retirement. Outline any other investment plans you have, such as building college funds for your children. Do the math and see which option will help you meet your personal goals fastest.
Life insurance is an important investment for anyone who has debt or other financial responsibilities that must be taken care of after their death. While you will likely outlive a term life insurance policy, this plan can keep you covered while leaving plenty of cash in your pocket for addressing the other important financial goals in your life.
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