Understanding the differences between Term Life and Cash Value life insurance plans and which will benefit you the most has always been complicated and confusing. Everyone has an opinion: advisors, experts, agents, family members and even friends. Both sides do their best to present mathematical data to support their opinion but this distracts people from understanding the true nature of each product.
The debate revolves around the benefits or drawbacks of buying Cash Value life insurance (which includes whole, universal, variable and return of premium life programs) compared to purchasing a much less expensive term life insurance policy and using the savings to pay down debt and make investments. Our intent is to focus attention on some of the often-overlooked issues to help our clients make informed decisions.
Do You Need Life Insurance?
Term Life provides the most affordable option for people to purchase the life insurance they need. First and foremost, life insurance is for protection and having the right amount of coverage is the most imperative goal. Significantly higher cost Cash Value plans not only reduce money available for other financial priorities but limit the amount of coverage a family can afford, which defeats the whole purpose of protection.
A principle concept of Cash Value plans is that people need policies for their "whole life." This approach promotes the idea that you will always be in debt and unable to meet the obligations of your family. In reality, you only need it for as long as your premature death represents a financial strain to your family. If you are out of debt and have built your savings, then why do you need to continue to pay for any type of policy? By getting rid of debt and maximizing other investment opportunities, the need for a policy for your "whole life" is eliminated.
Financial Benefits Of Term Life Insurance
With guaranteed level Term Life plans offered for 15, 20, and 30 years, the comment that Term Life plans are short term and will leave you without protection are exaggerated. Many will point out that term life policies pay fewer claims since they can expire while the insured is still alive. This is true, but does it matter if you don't need the coverage any longer? Why is life insurance any different than home or auto coverages that only pay if there is a claim? Guaranteed level term life policies provide for secure and stable insurance options and allow individuals to focus on other more beneficial financial goals.
Flexibility is often pointed out as a key benefit of Cash Value plans. Through forced savings, expenses for education, retirement and emergency needs can be bundled together for extra protection. This is a flawed approach since there are better investment options available for these circumstances. Programs such as 529's and ESA's (Education Savings Accounts), along with company matching retirement plans, 401k's, Simple IRA's and especially Roth IRA's, offer far better investment options, tax benefits and rates of return than 'investing' in a life insurance policy.
The Downside Of Cash Value Plans
When cash value agents use mathematical data to prove their point they often overlook other key issues. They never seem to take into account the cost of your continuing debt while saving in their plan. In addition, access to your savings requires a loan and interest paid to the insurance company or a withdrawal, which reduces the policy amount if not repaid. They also overlook that only the policy death benefit is paid to the beneficiary -- not the savings. In the end, clients continue to be in debt, have additional costs to access their money and do not receive their savings if they die.
The real shortcoming of Cash Value policies is that they don't address the true needs of today's American families. We are a society strained by debt, struggling to balance our finances and responsibilities and are focused on spending. Cash Value plans weaken our ability to overcome these challenges since their product simply perpetuates the situation instead of helping solve it. This is a primary reason that over 50 million American families are either uninsured or underinsured today.
Determining The Best Option For You
In the end, it is important to work with a reputable provider to assist you in finding the most affordable term life insurance plans available. This helps you to focus on the ever-important process of establishing an emergency fund, getting out of debt and seeking out high quality investment opportunities to build wealth. Term insurance is not the solution to everyone's financial needs, but simply an important part of a plan that helps maximize their potential for financial peace and success.
Christine O'Kelly is a writer for Zander Insurance Group, a leading life insurance provider. Zander Insurance Group offers a wide range of insurance services, including term life, disability, identity theft and more.