TERM OR CASH VALUE LIFE INSURANCE. WHAT IS BEST FOR YOU?
I am often asked the differences between Term and Cash Value Life Insurance. I like to use this analogy. Traditional Term Life Insurance is like renting a house. A renter may sign a lease for a period of time At some point in time, the landlord can increase his monthly rental payments. That monthly payment can get so unmanageable that the renter may have to look for a less expensive property to rent. The renter does not build any equity in the home that he is renting because it does not belong to him. If he misses a monthly payment, he can be evicted.Traditional Cash Value Life Insurance is like buying a house. When a purchaser buys a house with a fixed mortgage payment, he makes monthly payments usually for 15 or 30 years. As he continues to make payments, his house builds equity. It increases in value. He can borrow against that equity to make improvements to his house, take vacations, pay bills, educate his children and so forth. If he decides to sell his house at some future date, he can usually do so for a profit.
As the Life Insurance industry evolved, many variations to Term and Cash Value Life Insurance products have been introduced. The most common Cash Value Plans we see today are Whole Life, Universal Life and Variable Life. Term Insurance has basically remained unchanged except for the fact that it has become less expensive in recent years due to increased competition and the fact that people are living longer. The most innovative improvement that I have seen recently to Term Insurance is the introduction of the Return of Premium Option. This option causes Term Products to act similarly to Cash Value plans.
At the end of a 20 or 30 year period the client may have an option to continue the policy at a higher monthly rate, receive a reimbursement of all premiums made into the policy less any funds previously paid or he may accept a reduced paid up life insurance policy. These policies are usually less expensive than Cash Value policies. In my experience, these plans are excellent for young insureds perhaps in their 20’s or 30’s. They also fit nicely into Key Man Plans for businesses.
Historically, Term Insurance Plans do not pay the vast majority of death claims. As people age, the Term Insurance Plans that were purchased at an earlier age, become very expensive to keep in place. As a result, these plans are replaced with Cash Value plans that are just large enough to cover Final Expenses.
So, is Term Insurance or Cash Value Insurance best for you? Before I can make that determination, I look at each of my clients on a case by case basis. As a general rule for young insureds I recommend looking at purchasing both plans while they are young and healthy. The Term Insurance is very affordable and will provide protection while raising a family and paying off a mortgage. One option for purchasing a Cash Value Life Insurance plan is a 10 pay life. This simply means that the policy will be paid for after a 10 year period. It can then be set aside for Final Expenses after the need for Term Insurance has past. I can not stress enough that life insurance should be purchased while we are young and healthy. Life Insurance is not purchased for us, it is purchased for those that we leave behind.