Despite the title of this post, I am a huge fan of life insurance. In fact, if it weren't for term life insurance, I never would have been able to go to college and have a career as a financial adviser. (My father compared term life vs whole life and bought a small term life policy two months before he passed away unexpectedly at age 44. That life insurance served as an important safety net for me and my siblings.)
Nobody knows when their number is up, of course. But regardless, there are two kinds of people who simply must own life insurance:
A. If you have a large enough estate to be subject to estate tax. (This doesn't affect many people.)
B. If other people would be financially devastated if you died prematurely.
While the first condition doesn't apply to many people, the second condition applies to most of us. If others rely on you, I strongly encourage you to buy term life to fulfill your responsibilities. Having said that, I want to point out that there are many other kinds of life insurance that you should never buy. Let's look at four that simply don't make sense.
1. Guaranteed issue. Guaranteed issue life insurance is peddled on late-night television. You've probably seen the ads. The major selling point is that if you apply, you can't be turned down. On the face of it, it might seem like a no-brainer. But there is actually far less to this policy than meets the eye.
First, if you do purchase such a life insurance policy and die within two years, most policies call for the company to simply return the premium you paid. That means if you are very ill and don't expect to live a long time, this might be just a waste of energy. Also, the death benefits are very low and the premiums are expensive.
If you absolutely need life insurance, can't get coverage elsewhere, and think you have a chance to live beyond the exclusion period (check with your carrier), you may have no choice but to purchase a guaranteed issue policy. But please check into other alternatives, like senior term life insurance first.
2. Life insurance for children. In general, life insurance for kids is a huge waste of money. That's because (thankfully) most children are born healthy and live a very long time. And since children don't have any income, you don't really have any reason to insure their lives, as cold as that may seem. Just because you don't buy insurance doesn't mean you don't love your children. It means you are smart enough to put that money to better use-like saving for a college education.
3. Travel/accident insurance. This coverage is very cheap for good reason. Most people arrive at their destinations safely, and very few get into terrible accidents. And what does it matter how you die, by the way? Why would your family need more life insurance just because you died in an accident rather than from an illness? I know this sounds crass, but this insurance makes no sense. Rather than throw your money away on these policies, have an extra-large, fresh-squeezed orange juice at the bar while you are waiting for your flight. You'll live longer.
4. Whole life/universal life. Life insurance is a tool, not an investment. With whole life/universal life insurance, you will pay a higher premium with the promise that the company will take those extra dollars and invest them for you. The problem is that this type of insurance is very expensive. The investments don't grow because the expenses eat up your interest.
In 29 years as a financial planner, I've yet to see whole life or universal life pay off for any client. Often, people have little to show for such policies other than the money they paid in. Whole life and universal life policies are the reasons why life insurance companies can afford big buildings and Super Bowl ads. The only time these policies make sense if you have an estate-tax problem but this is a subject beyond the scope of this post.
Life insurance is a very important tool. When you use it for its intended purpose, it's great. That means you should look to term life to cover your family protection needs. Ignore the slick sales gimmicks of guaranteed life, life insurance or children, travel and accident insurance, and whole life/universal life.
What kind of life insurance do you have? Why?
Neal Frankle is a Certified Financial Planner in Los Angeles and an authority blogger at www.WealthPilgrim.com.
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