Chances are you've heard this topic come up at least once before. This is a subject that can bring some pretty strong emotions to the surface (especially when you're hearing it from an insurance agent). But it is extremely important to know what kind of insurance to buy and how much of it you need. In my opinion, the best way to find out is to understand the difference in how each of these products works.
Let us start with Whole Life. I will come right and say it. I cringe every time someone informs me that they have a Whole Life policy! Why, do you ask? Whole life is a broad term that can get confusing real quick. It can incorporate other names and features, such as Universal, Variable, Permanent, and so on. Each of these can mean the policy has different features, but for now, let's just talk about plain Whole Life Insurance. This type of policy comes with two components. First is the death benefit (which is likely why you bought the insurance in the first place). The second feature is that they have a "savings" feature attached to them. Every time you pay a premium on this policy, the insurance company is gracious enough to put a portion of that money into your savings account that is part of the policy. The insurance company may even invest it for you, depending on the policy. That doesn't sound so bad, right? However, there is a cap on what your invested money can earn. If your investment returns 8%, you may only get 3%. The rest goes to the insurance company. As far as the savings aspect, you can get decent interest at many different banking institutions without having to take out an insurance policy. The death benefit on a Whole Life policy is sub-par as well. Whole Life is almost always much more costly for the coverage that you get and often comes with a myriad of contingencies that could affect the payout.
So what about Term Life Insurance? It's simple really. You take out a policy for a specified amount of time referred to as the "Term". The premium or payment on this policy is generally (in fact, I've never seen different) much lower than that of a Whole Life policy. The arrangement is simple if the insured passes away, the beneficiary receives the life insurance payment. Outside of the insureds passing being self-inflicted, there are no fine print payment reductions that you may encounter. How much do you need? This number differs depending on the family and also the advisor. On average, the industry-standard will recommend 8-12 times your annual income.
The next time you are reviewing your insurance benefits through your employer, take time and discover what they offer. Chances are you could get better products for less money. Insurance is one of the many concerns that an unbiased financial planner can help you solve. Stay tuned for more!