America is currently in the middle of one of the worst economic crises since the Great Depression. Because of this, families are trying to find ways to save a little extra money. Experts agree that many families make mistakes by cutting back or eliminating their life insurance at a time when the protection is needed the most. Tough economic times, higher unemployment and an uncertain period of recovery actually puts families at higher risk since it is more difficult for a surviving family to recover from the emotional and financial loss of a breadwinner.
The situation is further complicated by the confusion related to the types of life insurance policies offered today: Term Life vs. Cash Value Plans. The debate revolves around the benefits or drawbacks of buying Cash Value life insurance (which includes whole, universal, variable and return of premium plans) vs. purchasing less expensive term life insurance and using the savings to pay down debt and build investments. The discussion has raged on for years but deserves a fresh review since new products are now available and the attitude concerning debt by American families has shifted considerably.
First and Foremost: Life Insurance is for Protection
The real focus of the debate between Term Life and Cash Value plans should be on what each product accomplishes and at what expense or sacrifice there is to the insured and their beneficiaries. The mathematical comparisons presented tend to manipulate the numbers to promote either side’s desired result. Life Insurance, first and foremost is for protection and having the right amount is its most imperative goal. In addition, an insured only needs a policy for as long as their premature death represents a financial strain for their family. Higher cost Cash Value plans (often 8 to 10 times more expensive) are based on the concept that people need policies for their “whole life” since they will always be in debt and unable to meet the obligations of their family. These higher cost cash value plans actually perpetuate this “whole life” indebtedness concept by reducing the amount of coverage a family can afford when they need it most and by redirecting funds into savings plan with poor rates of return while continuing much higher credit card and other debt expenses.
Insurability, Flexibility and Savings
Term Life plans today offer guaranteed level premiums for 15, 20 and 30 years which provides for long term secure and stable options and allow families to focus on more beneficial financial goals during these periods. Additionally, the forced savings and flexibility aspects of bundling all your savings needs into a Cash Value plan to potentially use for education, retirement, housing and emergency needs significantly overlooks more advantageous plans. Programs such as 529’s, and ESA’s (Education Savings Accounts), along with company matching retirement plans, 401k’s, Simple IRA’s and especially Roth IRA’s all offer far better investment options, can be set up as forced savings plans and offer tax benefits and rates of return far exceeding those of a life insurance policy.
Many proponents for these plans will emphasize that Term Life insurance is temporary since it can expire and will eventually leave the insured’s family unprotected. In addition, the savings account that is part of Cash Value plans are forced savings that help offer flexibility to address the various needs families face in the coming years. In earlier times statements like this may have been accurate but with the introduction of so many new products and tax favored investment options the benefits of these types of plans have reduced significantly.
Is Term Life Insurance the Only Answer?
Term Insurance is not the answer to every family’s financial problem…but it isn’t trying to be. It allows families to focus on getting the right amount of protection at the lowest cost possible and to concentrate their funds on more important and productive strategies such as establishing an emergency fund, paying down debt and seeking out quality investment options to build wealth. This is the true value of Term Life policies that is often overlooked by all the other sales tactics employed within the life insurance industry. The real short coming of Cash Value plans is that they focus on trying to be everything to everyone and in turn dilute their effectiveness. America is a society strained by debt and struggling to balance our finances and responsibilities. Cash Value plans weaken a family’s ability to overcome these challenges by perpetuating debt under the guise of safety and security.