At some point in everyone’s life, they are confronted with the decision to purchase, or not purchase life insurance. Although a grim subject, thinking critically about the costs and benefits associated with life insurance, and its inherent alternatives, will prepare you and those that depend on you, for the future. Before unpacking your options, lets clearly define them for the purposes of our analysis:
Term Life Insurance: Insurance that pays a benefit in the event of the death of the insured during a specified amount of time.
Whole Life Insurance: Insurance that pays a benefit in the event of the death of the insured, for the duration of the insured’s life, while also accumulating a cash value.
Although these products seem straightforward, when making an investing decision, its not always that easy. One reason the decision is not cut and dry is because of the alternative to these two products; investing. Whether it be investing in mutual funds and stocks, or real estate, there are other options for you to invest your hard-earned dollars, that provide you more control and possibly higher returns than life insurance.
Cost/Benefit Analysis of Purchasing Life Insurance vs. Investing
Let’s explicitly review the up/downsides of each of these ‘investment’ avenues:
As you can see, there are benefits to each of these potential investment avenues. We’ve split the investment decisions up according to which stage of life you are currently in, as that has such a large impact on your decision. A person living on their own that only has themselves to support, approaches this decision from a different angle than a person with a husband/wife and/or children/grandchildren. Investing your money into stocks, savings or some other form of financial product provides you with the most freedom, regardless of stage of life you’re in. However, it also saddles you with quite a bit of risk stemming from the lack of guaranteed benefit for those that depend on you. On the other hand, term and whole life insurance both provide you with benefit payout assurance; whole for your entire life, but term for a distinct amount of time. As a result, whole life insurance is significantly more expensive than term.
So Which Product Do I Choose?
One aspect of this decision that we cannot account for is your personality as it relates to appetite for risk. As such, you should incorporate this trait into your decision as well. During your ‘pre-dependents’ days, investing your hard-earned dollars into stocks, real estate and other financial products is advisable, as this is the one time in your life where the potential upside outweighs the downside, given you have no one truly depending on you. As you move into the post-dependents and retirement phases, your risk tolerance, as it relates to the people you support, will decrease. As it does, you should begin to shift your focus to more reliable products such as whole or term life insurance. This is where financial stability comes into play. If you are already stretched thinly regarding expenses, you should look at a term life insurance option that at the very least, covers your dependents during critical times in your lives (i.e. birth of a child, child going to college, parents are ill). Conversely, if you extra funds to invest, the peace of mind, payout assurance, and cash value appreciation factor of whole life insurance is certainly worth it. In essence, you should look to utilize all three of the options we’ve discussed, just during different times within your life.
Now that you’re equipped with a plan, let eINSURE help you find the life insurance best suited to your circumstances!