Life Insurance... Yes or No

Ed Wedel

A number of years ago, evangelist Billy Graham was asked whether he believed in purchasing life insurance. His response was quick and sure, "I most certainly do,” and proceeded to quote 1 Timothy 5:8 which says: "If anyone does not provide for his relatives, and especially for his immediate family, he has denied the faith and is worse than an unbeliever.”

It has been said that there are only two certainties in life…death and taxes. If the time of death comes before old age, we will probably leave behind family that needs to be taken care of. Death does not relieve us of that responsibility.

Life insurance may be purchased for many reasons including covering a debt like a car loan or mortgage. Most importantly, life insurance replaces a loss of income when a financial provider dies. Life insurance pays a tax-free benefit to the beneficiary that can be used to pay off debts and invested to provide income.

There are really only two types of life insurance: permanent and temporary. Permanent insurance comes in two types, that being whole life insurance and universal life insurance.

Whole Life insurance includes two main components: protection and savings (referred to as cash surrender value). Typically, the premiums are guaranteed and the insurance company sets the rate of interest on the savings which usually tends to be quite low. The insurance company will also pay an annual dividend which can be used to add to savings or purchase additional insurance. This tends to be the most expense insurance.

Universal Life insurance also includes protection and savings. However, the policyholder may choose from a number of investment options from guaranteed investments to market based investments like mutual funds. The policyholder must pay a minimum premium to cover the insurance portion, but can add additional amounts to build up the investment side of the policy. Investments within the policy grow tax-free as long as they remain in the policy. This insurance may also carry a higher price tag because of additional benefits and options.

Probably the simplest insurance to understand is temporary insurance, called term insurance. Term Insurance is pure protection, no additional bells and whistles. Term Insurance is purchased in yearly increments of one, five, ten, twenty years, and even term-to-100. When you purchase a term of 10 years, you are fixing the premium cost for the 10-year period. Upon renewal the premiums will go up. It is best to consider Term Insurance that is "convertible” so that if you were to become uninsurable later in life, you would have the option to convert it to a permanent plan. Term insurance is the least expensive type of insurance.

One concept that is taught in many financial planning books is to buy term insurance in order to keep your costs down and invest the difference you would have paid to purchase a higher cost permanent policy. This way, when you don’t have a lot of savings, you rent money from the insurance company until you have had a chance to build up a nest egg over time.
Of course there are many reasons to buy life insurance that I have not touched here, including estate planning, charitable gift options, etc. I recommend that you explore life insurance for yourself and your family; speak with an Insurance Broker who has the ability to shop the insurance market and provide the best individualized solution for you.