Life Insurance

There are two main types of life insurance. There is term life insurance and permanent life insurance. Term life insurance is what most people need, but there are certain situations where permanent life insurance can make sense. Term life insurance is generally going to be much cheaper than permanent life insurance. 

A big difference between term life insurance and permanent life insurance is that term life insurance only has one purpose; to pay out the death benefit if you pass away so that your beneficiaries are taken care of (usually a spouse, kids, or other family members). If you get a 30-year term policy and you pay the premium each year for 30 years and are still alive after the 30 years, then the policy did its purpose. The purpose of it was to provide peace of mind (insurance) to you and your family in case something happened. You should be happy you didn't have to use the policy because that means you are still alive. You didn't waste the money.

Permanent life insurance is different in that there is a cash value that accumulates and grows over time (this is partially why the premiums are more costly than term policy premiums). If you had purchased a permanent insurance policy and paid the premium for 30 years, you would most likely have a cash account that is worth something when the 30 years are up. Generally, the fees that consumers pay each year for the permanent life insurance policy are higher than they would have been if the consumer took the difference in the premium cost of a permanent policy and term policy and invested in a low-cost index fund that tracks the stock market. Another point about permanent life insurance policies is that the cash value is tax-deferred (meaning you don't pay taxes on the gains until taken out of the account, similar to IRA or 401k).

If someone has enough income each year to max out the contributions to their HSA, 401k, and IRA accounts, and still have additional cash they want to save, then looking into permanent insurance might make sense. Even then, some people don't like the added complexity of dealing with permanent insurance policies. Another thought would be to contribute to your taxable investment accounts once you have maxed out your retirement accounts to add flexibility to your investments in case you need money before you reach retirement age or age 59.5. Age 59.5 is important because if you withdraw from a retirement account before then, there is an early withdrawal penalty. 

Another thing about permanent insurance is that there are different types of it: whole life, universal life, and variable life. 

While we don't sell any types of life insurance, we are happy to help talk through them with you if you have questions. Feel free to reach out to us at team@cashflowisthecore.com.