January 2nd, 2006 | 
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My husband and I are healthy and in our mid to early twenties, with one child. How would I know which life insurance is best for our family?
Silvana Clearman
My husband and I are healthy and in our mid to early twenties, with one child. How would I know which life insurance is best for our family?
Silvana Clearman
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Generally term insurance would be better because you are so young. You want max benefit and minumum cost. You are not worried about a cash value in that case.
These are two different policies. A term life assurance is usually used partly as an investment and partly as life cover. Whereas whole life is, usually whooly used for life cover. So you have to work out whether the investment part of the term policy is better than any other form of investment.You or your adviser should be able to strip out the cost of the life cover and then you can work out the value of the investment part. Basically you are paying money in by way of premiums and getting a lump sum at the end of the term.You need to discount the future value of the lump sum which is not going to be easy because we do not know what is going to happen to inflation, but you should be able to compare the investment against say a cash in bank with compound interest over the term. i.e disregard inflation for both investments. Try and see exactly what you are buying (as above) and ask the salesman to explain this and ask him what he thinks will happen to inflation over the term of the assurance. (I bet he will not know) All I can say is you really want some form of life assurance on the breadwinner, so that if the worst happened you would be able to pay off say your mortgage at least.If you are healthy you should be able to get relatively cheap whole life cover, or at least a term that will cover the mortgage term (called a Mortgage Protection Policy; you may already have one). I suppose what I am saying is don’t be talked into buying an insurance based investment if you don’t really want an investment. Although some people take out small premium policies for their children that payout for example when the child needs to buy a car or fund further education. Although this is probably a poor form of investment it does help you to save if you are not good at saving. Don’t be swayed by the salesman. They will probably say “look it’s only a couple of pounds a week and in ten years time you will get £5000.” OK, so £5000 could buy a nice secondhand car at today’s prices but in ten years time that £5000 may only be ‘worth’ £2000 or £3000. Hope this helps.
Raysor, you are completely mixed up on your advice! Term insurance doesn’t have any investment portion at all! It’s strictly insurance. It’s whole life that has the investment portion (the cash value or policy fund)! I don’t know about the rest of your post, but your first couple lines are completely false unless the products outside of North America are named the complete opposites of what they are here!
It depends on what you are insuring and why.
Generally, Term insurance is meant for temporary protection for ‘problems’ that will eventually go away. These ‘problems’ would be things like Debt or a mortgage (eventually you will have it paid off so it’s not a problem), making sure the kids get through school (after they are old enough and get through college, that’s not a problem anymore). If the need will go away in less than 20 years, term insurance is likely the way to go. Term insurance will eventual expire whether you want it to or not (ussually around age 85), will increase in price at the end of each term is you renew it and has no cash value if you cancel it. Think of this like renting insurance…good for a short time, but not a good long term plan, since the landlord can increase the price, kick you out and you don’t get anything out of it when you leave.
Whole Life is used perminant needs that don’t go away. These needs would be things like funeral costs (whether you die tomorrow or when your 90, this will still cost money), Final Taxes (when you die, you still need to file a tax return that year), Estate taxes (if you think you will have a large estate when you are older, you will want something to make sure the beneficiary will be able to pay the taxes). You can also use a whole life insurance policy as collateral at the bank, so many use it to maximize their retirement income (when you borrow money form the bank it is not taxable money since it’s just borrowed), so if you are a high income earner this might be good for you as well. Any need that will last longer than 20 years it’s generally better to go with whole life. Whole life never expires, the price stays the same and builds cash value. This is like buying a house: the payments stay the same, you can never get kicked out and if you do leave, you get some money out of the equity in it.
It is common for young couple to have a mix of both tpyes of insurance. A small whole life policy ($50-100,000 depending on the need) to cover all the funeral costs and such, and then a bigger term policy ($500,000 depending on the need) to cover the kids and mortgage and such.
If you still aren’t sure, contact a lisensed broker in your area who sells both term and whole life and who has access to multiple companies. They will be able to help you sort out which you need and how much of each. A broker will truly work for you and shop around for the best product on the market. Someone that strictly works for one company will try to sell you on their product whether its’ the best or not.
You need to talk to an insurance agent and answer the following questions:
Is the need temporary? (like a mortgage pay off, loan payoff, funding education) –Term
Do I need help saving $ — Whole life or universal life
Do I need some tax deferral strategies? Whole or universal life
How’s my health? If you are young and healthy, you can buy a permanent product cheaply, so the premiums should not rise. If you have a lot of life events ahead of you, (birth of children, buying a house, etc) consider 30 year term.
Typically term insurance will be better, especially if you are a reasonably disciplined person. Here is why: when you buy term life insurance, you are buying just coverage in case one of you should die. So you are covering the true need — a catastrophic loss of income (and if one of you is an at-home parent caring for the child, you may also need to have insurance on that person to cover the increase in the cost of child care). If you buy whole life insurance, you are actually buying two things — coverage for a death, but also a savings plan. Sounds good, right? The problem is that the “savings” portion typically will give you a lower rate of return on your investment than if you saved yourself.
So if you can buy term insurance for $30 a month, but whole would cost $250 per month for the same death benefit, then your best bet is to buy term insurance for $30 and put $220 away as an investment.
Why does it matter whether you “invest” with a life insurance company or invest on your own? One big reason is fees. The insurance agent gets a big (could be 50%) cut of your first year’s “investment”. The money you put in at the beginning has the longest time to grow, so in effect, you pay not just that first year’s fee, but you also lose the money you would have earned from the investment of that money. So if your insurance agent gets a $500 commission, you actually lose the over $1500 that $500 could turn into over 20 years.
That all said, if you are not a disciplined person and need some extra push to save, whole life might make sense. But I think there are probably other ways to save, like an automatic paycheck deduction, which can give you some extra help saving if you need it, but which cost you less money in the end.