Navigating life insurance requirements is a challenge that financial advisors often help clients tackle. Unquestionably, life insurance plays an essential role that deserves your attention. The life insurance industry, however, has become a bit of a sales behemoth over time, with agents pushing high-commission products. As a result, many are discouraged from exploring this crucial area. At MDRN Wealth, we understand the implications of insurance planning and choose not to sell it. Instead, from a fiduciary perspective, we aim to guide you through the basics of life insurance.
Understanding Your Life Insurance Needs
Before delving into the two fundamental types of life insurance, let’s first consider if you need it. Life insurance provides financial support for your loved ones in the event of your untimely death. The payout depends on the coverage you opt for. Key considerations when assessing the need for life insurance include:
- Can your spouse cover the mortgage without your income?
- Would your children still be able to afford college?
- Could your spouse retire as planned?
- If you or a business partner died, would your business survive the disruption?
Life insurance typically generally doesn’t make sense for single individuals with no dependents. However, it could prove beneficial in many other situations. If it does seem necessary, then you need to understand the two basic types of life insurance: Term and Whole Life Insurance.
Term Insurance
Term insurance is a cost-effective way to secure life insurance coverage. For instance, a 45-year-old male can get a $500,000 term life policy with a 20-year term for about $60.56 a month. However, term insurance operates much like renting a house. Your monthly payments go straight to the insurance company, and your premium never increases during the term. Once the term expires, renewing the policy will likely cost more due to increased age.
Whole Life Insurance
Conversely, whole life insurance functions similarly to buying a house. Part of your monthly premiums contributes to an accumulating cash value. This cash value grows tax-deferred over time. However, whole life insurance is significantly more expensive. A $500,000 policy for the same 45-year-old male could cost around $866 a month.
Recap of our 45-year male buying $500,000 worth of life insurance
| Term Insurance
*Policy in place for 20 years |
Whole Life
*Policy paid off at 99 |
| $60.56 a month
X 12 $726.72 annually |
$866 a month
X 12 $10,392 annually |
Which Is Better?
At MDRN Wealth, we believe that term insurance is often the more sensible choice. The annual cost difference can be significant – almost an extra $10,000 for the whole life policy. While the whole life policy does accumulate some cash value over time, it generally doesn’t justify the increased cost. We believe that it’s wiser to opt for term insurance if necessary, and invest the rest independently.
Life insurance should function as its name suggests—Insurance. It shouldn’t be a vehicle to accumulate savings, invest, or build wealth. That’s what your brokerage and retirement accounts are for. If you need a life insurance analysis to determine your coverage needs or require a plan to invest your savings, please don’t hesitate to contact us.
RELATED READING:
Important Disclosures
The information provided in this article is general information. It is not intended to be construed as investment, tax, or legal advice. This is not an offer or solicitation to buy, sell, or endorse any company, security, fund, or other investment vehicle. Investing involves risks including possible loss of principal. Past performance is no guarantee of future results and the opinions presented cannot be viewed as an indicator of future performance. Opinions are subject to change without notice.
