To say that ‚Äúterm life is always the best kind of life insurance to buy‚ÄĚ would be dispensing what I call ‚Äúone-size-fits-all financial planning advice.‚ÄĚ
I am fiercely opposed to doing that, as I‚Äôve seen it cause too much damage to unsuspecting individuals who thought they were getting a truly personalized financial plan.
To understand what type of life insurance you need, you must first understand why you are buying it.
If you need life insurance to provide for your untimely death before your teenager is 18 or 19, or to pay off a 15-year mortgage, those are examples of what we call a ‚Äútemporary death protection‚ÄĚ need. It lasts for a certain length of time, and then ends.
However, some needs for life insurance are permanent. For instance, paying for final expenses such as burial, last medical, or your final income tax or estate tax bill, are all death protection needs that exist whether you die tomorrow, next year, or in 50 years. They never completely go away.
Coincidentally, there are two types of life insurance: term and whole life. They are, respectively, temporary and permanent in their duration.
Term insurance lasts for a specified length of time (or a specific ‚Äúterm‚ÄĚ) and whole life lasts ‚Äúyour whole life‚ÄĚ unless you choose to get rid of it sooner.
The permanency of whole life insurance can be purchased not just with plain whole life, but with variations of that have other names including universal life, variable life, and universal variable life insurance.
You want to match the coverage to the reason you are buying it. If you want enough insurance to pay off a mortgage, term insurance will probably suffice. If you want to make sure your burial expenses never become the burden of a spouse or a next of kin, then whole life insurance is probably the right thing to buy.
A very important thing to consider is that term insurance eventually ends (at age 65 or before in most cases). At that stage of life, whole life is usually unavailable due to health reasons, or, it is prohibitively expensive.
So, some financial planners would recommend that you have at least a basic amount of whole life coverage for the sake of permanency, and then meet additional life insurance needs with term insurance.
Here‚Äôs the real point, though: to say that one type of insurance is always ‚Äúthe right kind‚ÄĚ or ‚Äúthe best‚ÄĚ is incredibly short-sighted, and doesn‚Äôt take into consideration the reasons you are buying life insurance in the first place.
I am especially leery of the financial planning gurus you see on the internet or television who make broad blanket statements about which type to buy. Make sure that whoever sells you life insurance actually inquires about your reasons for buying it, and takes those into consideration before making a recommendation.
Dr. Brenda Wells, CPCU, AAI, CRIS is the Robert F. Bird Distinguished Professor of Risk and Insurance at East Carolina University, as well as the director of the ECU Risk Management and Insurance Program. For information about the program or about the content of this article, feel free to contact her at [email protected] or at 252-481-2777.