The game of life is different for each one of us, but we tend to encounter the same major milestones along the way. Whereas people often gain life insurance due to these big events, there are still gaps where many people are going without.
Why you don’t want to think about it?
Reasons for the lack of receptiveness toward life insurance range from feeling it’s too expensive to be overwhelmed by the options available to feeling that the payoff could be far in the future, so why worry now?
“We’re all living longer,” O’Dell says, “so I think people are thinking, ‘Why would I buy insurance in my 20s or 30s when I’m going to live another 50 or 60 years?’ Plus, families are on tight budgets, and they have to decide if they want to spend an extra $100 a month on insurance for something that they may not need for another 50 years.”
Do you really need it?
If someone is depending on you financially, then probably yes, but for others, no, according to J. Robert Hunter, director of insurance at the Consumer Federation of America. “Only buy life insurance when you have a dependent to protect, usually a child.”
What kind should you get?
There are two basic types. Term insurance covers you for a set period of time, such as 10 or 20 years. It’s the more affordable type, however as you get older, if you renew your policy for another term, the price goes up. Whole insurance, also known as permanent insurance, lasts a lifetime — as long as you keep up with the premiums — and it has an investment vehicle attached. These policies tend to cost much more — and they sometimes come with more fees and high sales commissions — however, the price usually stays the same as you get older.
“For the majority of consumers, term life insurance is the right choice,” Hunter says. “Term is very inexpensive when you are young, and that is when you need it most.”
Term costs less because there is a lot of competition for this type of insurance, says Tom Warschauer, a finance professor at San Diego State University. It is bought “by more sophisticated investors who prefer to manage their own investments.”
O’Dell, on the other hand, likens term insurance to renting a policy. “When that term expires, you have nothing to show for it,” he says. “Most people drop the coverage in their 60s because it becomes too expensive.” Instead, he favors the permanent kind of life insurance as he says it’s a good place to accumulate some cash.
“You do build up savings inside that policy that can be accessed at any time,” he says. “You can use it for your kids’ college education, or it’s an emergency fund. It’s a great retirement vehicle because you can access it in a tax-advantaged way or even tax-free.”
The option San Diego State finance lecturer Seth Kaplowitz says may be best is a portfolio of whole life along with some term coverage. “If I were a young person, in good health, I would get a whole life policy because the premiums will be low, and I would be able to build up the cash value, and eventually, your premiums will vanish.”
Tips on buying insurance
- Get multiple quotes from a broker not employed by an insurance company.
- Talk to a financial adviser, but make sure they’re fiduciaries.
- Make sure you understand the policy inside and out before your buy.
- If you’re encountering high-pressure sales tactics, walk away.