Question:
My adviser just told me to buy term life insurance and invest the difference. I agreed, because I know I need life insurance, but mostly because that’s what I’ve heard you are supposed to do. I have no idea what this means. What is the difference?
Answer:
The main purpose of life insurance is to create an estate to take care of your heirs if you should die. Therefore, we believe the time when your need for life insurance is at its greatest is when you are young with young children. It is very likely that at this stage in your life, you have very little in savings, and any savings you have are likely going toward your children’s education. You may also be looking to buy a bigger home, new cars, etc.
The first person who should carry life insurance in a family is the breadwinner. Should the breadwinner die, you want insurance to replace the lost salary. Next, life insurance should be purchased for the second parent, even if the spouse is a stay-at-home parent. Should a stay-at-home parent die, the surviving spouse will likely have to hire help to raise the children and perhaps help with the cooking and cleaning of the home. The duties of a stay-at-home parent have an economic cost that can be covered with life insurance. We recommend never buying life insurance on a child. The unfortunate reality is that if a child were to die, his death would save the family money. Likewise, if you were looking to use the cash value of a permanent life insurance policy on a child for education expenses, we believe there are better investment vehicles such as 529 Plans or Coverdell Education Accounts.
When you are young, term insurance is generally the best bang for your buck. You should be able to get a $3 million policy very inexpensively. You may not be able to afford the equivalent coverage in a permanent life insurance policy. Generally, as you grow older, the children are on their own and your savings have grown. Your need for life insurance diminishes; therefore, you may not need the same asset protection as you did when you were young.
Many permanent life insurance policies build a cash value that you may be able to borrow against. However, we believe that most investors would be better off buying a term policy. We recommend taking the difference you’d pay for a term policy versus a permanent life policy and investing it in the stock market. Generally the return on the cash value of a permanent life insurance policy is less than an investor may get holding a 30-year bond. We recommend investors put their long-term money into the stock market. By investing the difference in the market, you have a variety of investment options to better suit your risk tolerances and savings goals. You may also be able to invest in tax-advantaged accounts such as Roth IRAs.
Most reputable investment advisers will recommend the “buy term and invest the difference” strategy. However this can be confusing when insurance brokers are pushing permanent life policies. Because permanent life insurance policies can be expensive, they likely earn the insurance broker more in commission. Only if you are very wealthy should you consider a permanet life insurance policy. If you have several millions in investable assets, perhaps then permanent life insurance can be considered.
At Henssler Financial, we believe you should Live Ready, and that includes understanding the role of term life insurance plays in your asset protection strategy. If you have questions on your need for life insurance, the experts at Henssler are here to help. Contact us at 770-429-9166 or experts@henssler.com.
Disclosures
This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
