Many of today’s popular money management authors, like Dave Ramsey and Suze Orman advocate canceling permanent life insurance with benefits in favor of term insurance and self-insurance. Ideally, this situation would save consumers buckets of money. One reason they give for this advice is that your money could make larger investment returns through other avenues-that whole life insurance is a “bad investment”. However, before you go running for your agent’s phone number, you should consider your future health, weight, ability to pay increasing premiums and your initiative to truly self-insure if you are in debt.
Level Term life insurance offers a single, set payout upon your death to your survivor during a specified contract period of time, typically ten or twenty years. The length of time is called the “term”. For example, a person with a ten-year term policy will pay X amount each month for ten years so that in the event of his death, his survivors will have money to pay bills, final expenses (funeral costs), joint debts (such as mortgages, car loans, personal loans or credit cards) and typically to replace the primary wage earner’s income until the children are out of the house.
Sounds great, doesn’t it? Not so fast. A typical thirty-two year old non-smoker in good health can purchase a ten year term policy at a very good price. Now, let’s do some “what-ifs”. Since after all, life insurance is all about planning for an uncertain future. What if at the end of the ten year term, the same man (now approaching middle age, married with a larger gut, couple of kids and a big mortgage) has developed a serious weight problem? Or cancer? Or diabetes? (Or high blood pressure, high cholesterol, sleep apnea, asthma, etc…?) When the term insurance expires, the man must reapply, including all new medical questions and physicals. He faces refusal, or sky-rocketing premiums he can no longer afford. Many, faced with unforeseen health problem at the end of a term period can no longer afford the coverage they need to replace new debts due to major surgery, cancer, or other health issue, or the now-increased income of the primary wage earner. In this case, the ten years of premiums provide no future protection for his family, after all.
Many money managers philosophy is that you since you will be out of debt (including your mortgage) and have an emergency fund, you will not need as much life insurance to protect your family. But some of the primary reasons (aside from number one, credit cards) that people get into financial difficulty or debt is due to unforeseen medical problems, accidents, or catastrophe. If you are currently out of debt, your emergency fund might be able to handle the astronomical debt caused by a fatal illness and the following funeral arrangements. But what if you are still working your plan?
Most people who purchase term insurance incorrectly access how much their future age, health and weight will affect their future changing premiums. The issuing term company is under no obligation to continue to cover the insured, once the term had ended. While certainly cancer, a heart attack, or diabetes may rule you out for their coverage, Many companies also have height and weight restrictions, as well as such common ailments as sleep apnea, restless leg syndrome, thyroid issues, high blood pressure, high cholesterol, and asthma in the mix (according to insweb.com).
So what’s the solution? Whole life insurance does lock in the premiums and provide a small cash value that can be borrowed against, but many may find it unaffordable, particularly if they are working a financial plan to get out of debt. For many young couples, a combination of whole life and term might be a better mix. If it will take ten years or more to be completely out of debt (including your mortgage) than adding some whole life to your coverage protects your family from possible uninsurable situations which may arise during your term period (or the time period until your financial freedom). Most whole life insurance offers a guaranteed purchase option up to the coverage amount. This means that if you have $50,000 in whole life insurance, every 3 years (up until a specified age) you can purchase an additional $50,000 without taking a new medical exam. By combining level term and a portion of whole life with a GPO (guaranteed purchase option), it’s possible to cover increasing family needs and provide a level of protection against future health risks.