Choosing the best type of life insurance can be a tough decision.
Everyone wants to prepare for the worst possible situation to protect their families and buying the right life insurance policy provides this protection.
But how do you know which type of policy to buy?
Many agents want to pitch whole life insurance, as it provides lifetime coverage, but then other experts like Suze Orman and Dave Ramsey argue to never buy whole life.
While term vs. whole life insurance is a hot debate, there are some instances when you should always buy term. Let’s review them quickly so you never make the mistake of buying whole life insurance when term is the right choice.
When Term is Better than Whole Life
There are an abundance of reasons when it is much better to buy term than whole life. Term life is not only much cheaper to buy, it can also be used to fill in a lot of short term life insurance gaps so your loved ones won’t be left financially exposed.
Here are some of the many scenarios when term life insurance can be the ideal solution:
1. Income Replacement – When you only want life insurance to replace your income were you to die unexpectedly, then term insurance will suit your needs perfectly. Most people simply elect the term period that most closely lines up with their projected retirement age.
2. Only Need Insurance for a Specific Time – If you just need a policy for a short period of time or a specific longer period of time, ranging anywhere from a 1 year renewable term, or coverage for 30 years or even up to a specific age such as age 65, term can be used for almost any need.
3. Business Loans – Almost any business loan you obtain needs to be life insured and you can get custom term products to cover the period you need for any business loan.
4. Cover your Mortgage – Term life insurance is ideal for mortgages. You can choose between a level term policy so any proceeds above and beyond the mortgage payout goes to your family, or choose a decreasing term policy where the coverage diminishes over set periods of time. Note: the maximum age you can purchase a 30 year term life insurance policy is 58 years old.
5. Children’s Tuition – If you have co-signed a tuition loan for your children or simply want to ensure that they will have the tuition money available down the road then a term policy can address these needs.
6. Buy Sell Agreement – When you enter into a business partnership, you will want the parameters of the partnership covered by appropriate yet affordable life insurance.
7. New Children – You may have just had your first child, and if you want coverage quickly and a policy that is affordable to financially protect your new offspring, a term policy is the way to go.
8. Recently Married – If you just married then you will want to get a policy to financially protect your partner. Also, in common law states, just keep in mind that when you marry someone, you also become liable for your partner’s debts so you want to financially protect yourself.
9. Key Employees – If you have very important employees that are vital to your business success and continued prosperity, you will want to get a term life insurance policy so your business can continue to operate.
10. Sole Proprietors – If you are self employed, you will likely be wracking up business debts and have business obligations that continue even after you die, you will want life insurance so your family members can properly dissolve your company and not be financially burdened.
11. Supplement Work Life Insurance – You may have purchased life insurance through your employer, but you will want to supplement this coverage with a separate policy. The reason is because the policy you buy through an employer is only good as long as you are still employed with them.
12. Funeral and Burial Costs – Funerals in the U.S. are expensive and if you want to ensure that your surviving family members don’t have to pick up the bill, a term policy is ideal to cover these costs.
13. Locking in a Premium When Younger – Term insurance is especially cheap when you are young. Since you are going to need it sometime you should buy a policy when you are young as you can save you a lot of money because the cost of insurance increases as you get older.
14. Pay Estate Taxes and Create Estate Liquidity – When settling an estate you could be overwhelmed with estate taxes. Having a separate term insurance policy which can be paid as a lump sum can alleviate that problem and provide other badly needed assets.
15. Charitable Donations – You might want to leave some money to your favorite charities and a term policy would be the ideal way to achieve this objective.
Keep in mind for numbers 12, 14 and 15, many advisors would recommend lifetime coverage. However, Dave Ramsey would argue to buy term and invest the difference, and you’ll save up just as much to be able to achieve your financial goals as what the whole life insurance would pay out. If you’re absolutely dead set on permanent coverage, you might consider guaranteed universal life insurance instead.
This post is written by Chris Huntley, a licensed life insurance agent in 48 states. He is director of marketing at JRC Insurance Group and blogs about life insurance at InsuranceBlogByChris.com.
