“Do I need life insurance?” “Is life insurance a good investment?” “Is Term Life Insurance Risky?” Questions like these are posted to online communities on a daily basis. The answers vary widely, with the term life and whole life fields polarized. The tone of the debate is surprisingly strident. After all, the issue is insurance, not something that is expected to inspire strong opinions, much less strong language. But words like “scam”, “scam” and “waste of money” come and go, sometimes accompanied by rows of exclamation marks or worse. What’s behind the ruckus? And which camp, if any, is the right one?
The two parties do not even agree on whether a person needs life insurance. All life says yes. You don’t want the death of a family member to disrupt your family’s finances or jeopardize your future. It’s hard enough adjusting to the loss of a loved one. Adding financial difficulties compounds the problem. With the high costs of funerals, even children and the elderly should have at least a small life insurance policy.
Not so fast, says the term for life. The only reason to have life insurance is to replace the lost income of a family member who passes away, and only when the spouse or family depends on that income. If he is single, he has no dependents or debts that can be transferred to his family in case he dies, then he does not need life insurance. If you’re married and his spouse works, you probably don’t need life insurance either, assuming your spouse earns enough to support himself or herself.
The time of life insurance, term annuities say, is when the policyholder’s income is vital to the family’s financial security. If, for example, you bought a house together and your spouse was unable to pay the mortgage and other bills on his or her own, then life insurance is in order. If you have children, you will want to have enough life insurance to allow your family to maintain their lifestyle after you are gone. This includes not only covering day-to-day expenses, but also being able to move forward with plans for higher education. Insurance professionals recommend purchasing a policy with a face value of 5 to 10 times the breadwinner’s annual salary to help the family cover expenses over a period of years.
Lifetime people see problems with the term life scenario. They see it as overly optimistic, even naive. Many things can happen during the 20 to 30 year period covered by your term life insurance policy that could extend the need for coverage beyond the end date of the policy. For example, children may be born with mental retardation, severe autism, or another serious condition that could prevent them from becoming independent when they reach adulthood. Children can also develop a disease or have an accident that disables them. A spouse can also be disabled. In these situations, the family will continue to depend on the income of the breadwinner long after the term life policy expires.
Proponents of term life insurance point out that in such cases, the breadwinner may renew the term life insurance policy or purchase a new one. Now it’s a lifetime’s turn to say, “Not so fast.” By the time the second-term life insurance policy is needed, the breadwinner is likely to be in his fifties or sixties. Due to the age of the insured, the cost of a second term life insurance policy will be much higher than the cost of the first.
With the added years, there are added risks of certain diseases. If the breadwinner is obese, has developed high blood pressure, a heart condition, diabetes, or another disease, the cost of the Insurance Backed Guarantee term life insurance policy will skyrocket. If the individual has developed cancer or AIDS, it may not be insurable at all. In such situations, the cost savings made on the first term life policy could be wiped out by the high cost of a second term life policy.
In contrast, the premiums for a lifetime policy are set for life and do not increase with age or medical condition.