In Part 8 in the series we are going to talk about applications of whole life insurance. To read earlier articles in the series you can click on the following: Part 1, Part 2, Part 3, Part 4, Part 5, Part 6, Part 7.
Whole Life insurance policies (which fall under the umbrella of "Permanent Insurance") are used for expenses that you are only going to have when you die, and will always have no matter when you die. I realize that sounds trivial, but lets look at an example of when you WOULDN’T need a permanent insurance solution. A lot of people buy insurance to cover the mortgage balance – the reasoning being that if one of the breadwinners die, the remaining family will not have to substantially change their lifestyle because of a financial requirement to do so. But you might not have a mortgage balance when you die – especially if you live to 80 (hopefully you will have paid off your mortgage by then!). So this is a perfect example of an insurance need that is temporary. On the flip side, costs for a funeral can be HUGE – they say to budget around $15,000 for a basic funeral. This is an example of a cost that necessarily happens only when you die – and therefore, this is a PERMANENT need.
Other examples of permanent needs are: covering taxes due at death to maximize wealth transference, creating an estate to transfer, a charitable gift, etc. So while the costs of Whole Life insurance are greater than Term Life, you don’t need to insure for such a large amount.
When you are younger, you may find that you need more insurance coverage than later on. This is because you have few assets coupled with a large amount of obligations that you would like to pay for, and you would like to make sure they get paid for in case you die. Namely: the mortgage and an income for your young family to live on if you are not there to make the income yourself. In this case you can see term policies with coverage in the $1 million range on a regular basis (whereas a whole life policy might be in the $25,000-$50,000 range for an average person). The $1 million might cover a $250,000 mortgage balance and the remaining $750,000 could pay for your income replacement for the next 15 years. While the amount of Term Life might be highest when you are starting your family, the cost is still fairly affordable because your chances of dying when you are younger are less. As you start saving and paying down the mortgage, you increase your net worth and decrease your need for insurance – since your family can just use the saved up assets.
When you die, and if you are lucky enough to live to an old age, you can see from the graph above that you may have significant assets to forego the need for insurance altogether (assuming you were a good saver!). In fact, many people do not have a need for ANY type of insurance when they get older and may not require even a small whole life policy. I mentioned above that one use for whole life insurance was to pay terminal taxes. Some people believe that there is no need to pay for insurance to cover tax liabilities and their heirs will "get what they get". This is purely a personal choice.
So, am I advocating that you shouldn’t have insurance of any kind when you get older? Of course not. What I’m saying is that you need to analyze your needs, your personal beliefs on money management and inheritances and then make up your own mind. One other use for life insurance is liquidity for immediate expenses associated with death (i.e. funeral). If you have an eye on the future of your family, perhaps you don’t want your heirs to have to liquidate certain assets when they may not be priced appropriately or favourably in the market – in which case the life insurance policy is a great liquidity provider.
(I’ll show you how you can assess how much insurance coverage you need in a future article, so the next time someone comes to pitch insurance you’ll know exactly how much you need and if they are just trying to line their pockets by pushing a larger policy…) But next in the series will be the transition from Whole Life to Universal Life! Are you as excited as I am? (Then you must be an uber-geek like me!) :)
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