Life Insurance is Love Insurance

Experts tell us that most people don’t have nearly enough life insurance protection. According to the QuickQuote Life Insurance Resource Center, in America only 45% of all adults have individual life insurance, and of those who do—over 65 percent are woefully under-insured. I believe that a lot of this has to do with confusion about what life insurance does and what it costs. As I present the No Debt No Sweat! Christian Money Management Seminar at churches nationwide, I find that there’s a lot of interest in this topic.

In many cases the folks who sell life insurance are a big part of the problem. Most of us would rather take a bullet to the head than to be locked in a room with an insurance salesman. But a little bit of education can go a long way here. 

To begin, you need to understand that life insurance falls into two very broad categories: Whole and term. For as long as they have both been around, there has been debate over which is the best.  Let’s take a snapshot of both types of coverage: 

Whole Life Insurance, also known as permanent insurance, is designed to give an individual coverage throughout life assuming premium payments are made properly and other provisions are followed. When an individual buys a whole life policy he pays a regular premium and gets the promise of a certain amount of money payable upon his death. Whole life costs more than term for a comparable amount of coverage because the premium you pay for whole life covers two expenses—the actual insurance protection as well as a separate cash account that is expected to grow over time. Some of the earnings that an insurance company makes (over those needed to pay the death benefit) are put into the policy’s cash value account, which the policy holder can borrow from, use to pay the premiums, withdraw, or allow to accumulate for retirement or other purposes.

 Much debate revolves around the actual value of this cash account.  Some experts argue that whole life makes better sense only if one plans to keep the policy for over twenty years. They explain that high front-end costs and commissions make whole life expensive unless the cash value is given time to grow and increase in value. Other experts in the field make the case that whole life cash value growth is often paltry compared to many other investment options, and may not make good financial sense. However, some advocates of whole life insurance point out that, in many cases, you can keep coverage even if your health deteriorates in future years.

There are a number of variations on the whole life theme. One of them is known as universal life insurance. Universal life became popular in the 1970’s when interest rates shot up and people began looking closer at the returns they were getting from their traditional whole life policies. One of the goals was to re-win consumers’ hearts by allowing more flexibility and paying higher rates of return. But experts at InsWeb explain that people soon learned that fluctuating interest rates could work against them with these policies, and in the worst cases, their coverage could lapse. 

Term Life Insurance is the other broad category of life insurance. Frequently referred to as “pure insurance protection,” term insurance doesn’t include the cash value feature that distinguishes whole life. Accordingly, term is usually significantly less expensive than the same amount of whole life coverage. This form of insurance covers you for a specified period of time (often 10, 20 or 30 years), and then it expires. If you are still alive, you get no money.  

In recent years there have been a number of changes (better term life products, a generally more astute public, and a greater assortment of investing options) that have diminished the appeal of traditional whole life insurance for many people. In my judgment, term insurance is the way to go for many people. To me, the purpose of life insurance to be just that—to insure a person’s life, nothing more and nothing less. I prefer to do my investing separately. I see life insurance as most appropriate until an individual either builds adequate assets to effectively self-insure, or until he has no more need for the coverage. The old adage, “buy term and invest the rest,” may prove good advice. Granted, it requires greater discipline to send a second check to a mutual fund or other investment. But, many people feel that the rewards outweigh the extra effort.

I like to tell people that there are at least three important things to look for in a term life insurance policy:

1) I’m big on stability, so I prefer policies that have a guaranteed level premium for the term of the policy. Annual renewable term policies can raise the premium every year, until the policy is surrendered. If you are only going to keep the policy for a short while, annual renewable term may be cheaper, but experts warn that in the long run it will probably be more costly.

2) Also, I prefer term insurance that guarantees level term benefits. This means that if you buy a 20 year, $100,000 policy, your beneficiary will get the full $100,000 whether you die in year 2, 10, 18, or whenever.  Decreasing term is another type of policy that will pay a lower benefit the closer it is to the end of the term. Sometimes sold by banks as mortgage protection, decreasing term benefit coverage is a big profit maker for the banks, but many experts don’t believe it’s very good for consumers.    

 3) Guaranteed renewable can help safeguard an uncertain future. Of course the goal is to get to the point where you don’t need insurance coverage at some point. And, besides, if you still do need coverage at the end of your term—you can just buy some more insurance at that time, right? Not necessarily.  It’s possible that you may still need insurance at the end of your term, and it’s also possible that health conditions could make it impossible to get decent coverage. What to do? You might wish to consider buying the original policy with the guaranteed renewal option.  This may make it possible to get more coverage at a later date. However, be aware that future rates can be prohibitively expensive especially if you health declines. Get detailed future rate information before you buy.

What About Mama?

In families where the mother stays at home to raise and nurture the children, sometimes you hear a thoughtless husband say, “Oh we don’t need life insurance on her because we don’t depend on her income.” 

Rather than argue the point, I think the best thing to do is to ask the question: “What does mama do around here?” After he has listed everything from counseling to car pooling, from shopping to studying, from bookkeeping to baking, from correcting to cleaning—then you might ask, “So, what would it cost to hire a professional to come in and do all of those jobs?” Finally, with an amount agreed on, multiply that times the number of years of childhood still ahead—and, there you have a ballpark figure of the amount of insurance that you need to replace Mama!

The Bottom Line

As the title of this article indicates, I think of life insurance as love insurance.  One of the most loving things a family bread winner can do is protect his family. One of the foundational building blocks to achieving this goal is to care enough to make sure that if you die, grief for your lose won’t be compounded by a financial catastrophe.