Low premiums, but what’s that catch?
- artcle by Lisa Binsfeld
Pat Roberts was 38 when his son was born. He knew he needed life insurance, so he contacted his agent, a personal friend, about buying a policy. After reviewing his options, Pat chose the cheapest one: a 10-year, level-rate term policy, with no future conversion options. He could have afforded more, but he wanted to keep his premiums low. He’d never smoked, rarely drank, and worked out 5 days a week. Pat felt it was a safe bet. Not long after his son turned 9, Pat was diagnosed with a serious heart condition. There was a chance he wouldn’t live to see his son through college. Over the years, Pat and the agent had lost touch. With his life insurance nearly at term, he called the agent. Could he renew the policy, or possibly purchase a better one? This time, he had no options. All his applications were denied.
Pat’s name and some minor details have been changed, but his story is true. It’s a scenario that could easily happen to any family, regardless of medical history or income level. Most people expect to lead long, healthy lives. The statistics are in your favor, but sometimes it doesn’t work out that way.
The agent in this story is Dave Binsfeld, Vice President of General Southwest Insurance Agency. And he has other unfortunate tales to tell. “People put off getting life insurance,” he says, “Either they don’t want to spend the money, or maybe they just don’t want to take the time.” He also sees families, like the one above, who choose term insurance because it’s a more affordable option. “It’s better than nothing,” he says, “But I always encourage people to go with permanent life insurance from the beginning, if they can. The benefits, long-term, way outweigh the costs for most people.”
Is term life insurance really so bad?
As the name states, term life insurance is purchased for a specific period of time. You choose the length of the policy, typically 10 – 30 years, and the insurance company sets a premium rate based on your age, health and the total death benefit you select. If you die within that time period, the policy pays the stated benefit to your heirs. If you survive the policy, you’ll have the satisfaction of being alive, but the insurance policy will cease to exist.
To be fair, a term life insurance policy can be appropriate in certain situations.
- You need life insurance only for a specific time period. Maybe you’ve just bought your first house, and your main concern is knowing your spouse could afford to cover the mortgage. Or perhaps you have young children and want to make sure their educational needs would be met if you die.
- You are young and in good health. Money can be tight when you are just starting out. If you expect to be healthy for awhile, there may be little harm in waiting. Ask about a term life insurance policy with a conversion option, so you can convert it to permanent life at a future date without having to undergo another medical exam.
- Your budget is tight. Sometimes, it just isn’t possible to meet your savings and investment goals. If you have people who depend on you, term life insurance is better than nothing.
The term itself is often the biggest drawback to a term life policy. When it expires, you might find you still want life insurance. To obtain coverage you will have to renew or purchase a new policy, but because you will be older, your premiums will be significantly higher. And if, like Pat, your health has declined, you may not be able to buy life insurance at any price.
Permanent life insurance – a better option
The benefits of permanent life insurance are, as the name implies, permanent. This type of policy combines life insurance with a long-term, tax-sheltered savings plan. Over time, the premiums you pay build up a cash value. Permanent life insurance can be structured in different ways. Examples include whole life, universal life and variable life.
All forms of permanent life insurance have the following benefits:
- Tax advantages. The cash build-up in a permanent life policy is tax-deferred. The dividends paid out are, in most cases, not taxable unless they exceed the value of your policy. Furthermore, your beneficiaries likely will not be taxed on any death benefits they receive.
- Access to cash. Once your policy has accumulated enough value, you can surrender all or part of this value for cash, or borrow from your insurer at low interest rates, with no credit check needed. You might tap these funds to pay for college, invest in a business opportunity, or supplement your retirement income. Money you borrow or withdraw will reduce the policy’s cash value and the death benefit, unless you repay it.
- Consistent premium rate. With most types of permanent insurance, the premium rate is set at the beginning of the policy. It will not go up, even if your health deteriorates.
- Flexibility with premium payments. Suppose you lose your job, or run into other temporary financial hardship. If you have sufficient cash value built up on your policy, you can stop paying premiums for a short time.
- Guaranteed coverage, regardless of your health. As long as you do not allow your policy to lapse, permanent life insurance stays in force your entire life and does not ever need to be renewed.
Permanent life insurance is essentially a financial tool that not only provides a death benefit, but can also be tapped for tax-free retirement income and even pay for long-term care, should you need it.
“That’s the beauty of a permanent life insurance product,” says Binsfeld. “If you buy in at a young enough age, while you’re healthy, you reap the benefits no matter what happens to you.”
How much, exactly, does life insurance cost?
Maybe not as much as you’d think. According to a poll by the LIFE foundation, 86% of Americans have put off buying adequate life insurance because of the expense, yet they overestimate the cost by more than 2 times.
Your life insurance needs vary greatly depending on your age, stage of life, and the number of people who depend on you financially. To get an idea of how much you need, use this life insurance calculator by Life Happens, a nonprofit organization dedicated to communicating the benefits of life insurance.
“My main advice to people,” adds Binsfeld, “is to buy young; buy permanent; and buy as much as you can afford. The money you invest in permanent life will always be there for you, no matter what happens down the road.”
For more advice about life insurance, and to find out if you have enough, contact your GSW advisor.
Learn more. Watch these insurance success stories from www.lifehappens.org:
Adam’s story: How permanent life insurance helped a child with spina bifida grow into an Olympic hockey player. https://www.lifehappens.org/videos/adam-pages-80-second-video/
Brigette’s story: How permanent life insurance helped keep a family business afloat in the face of tragedy. https://www.lifehappens.org/videos/keeping-a-family-and-a-business-afloat/