Term life insurance has become very popular, especially since financial guru Dave Ramsey is always recommending it on his radio show The Dave Ramsey Show and in his book The Total Money Makeover.
For those who are not sure as to whether they should purchase term or whole life insurance, some things to consider would be:
- Ability to invest after premium
- Amount of coverage
Term Life Insurance Offers More Coverage for Less Money
A young man under the age of 30 can purchase $100,000 worth of whole life insurance for about $150 a month. This money is usually arranged to be paid until the expected age of retirement. As premiums are paid, it will build up a cash value.
While a whole life program isn't a bad thing, a term life policy can be purchased for much less. In fact, that same man who bought a $100,000 policy could purchase 10 times as much for one third of the annual cost on a 20-year policy, leaving much security during those two decades while investments that would offset a lack of life insurance are put in order.
Investments are the Best Form of Insurance
By "self insure" it is meant that with enough equity, a person does not need life insurance. Using the example above of a person forgoing the $100,000 whole life policy for a term policy worth $1,000,000, the annual savings on premiums would be $1,200 for the first twenty years, and then $1,800 for the twenty-year period when the term policy is no longer in effect.
If this money was placed into a Roth IRA that only gained 5% each year over 40 years, the total cash value would be worth more than $173,000, or 73% more than the cash value offered on the whole life policy that was passed up.
The best part about being self insured is that a person can rely simply upon himself in times of need. If a whole life policy had been in place, and no other investments made, then a loan might have to be taken out from the cash value of the policy.
With a Roth IRA, on the other hand, an early withdrawal can be made if the money is needed before the age of 59. In events other than purchasing a first home or paying for higher education, a 10% penalty may be applied, but that is still better than the percentage applied to paying back the cash value on a whole life policy over several years while paying the high premiums for such a small amount of insurance.
With term life insurance, one can purchase a million-dollar policy, which would more than help just about any family in the event of a tragic loss. While doing so, the money that would have been spent funding a policy so much smaller can be invested to grow to nearly twice the amount of the whole life alternative.