Money Matters

Tips for finding the life insurance policy that is right for you

July 6, 2013 

Q: Our son and daughter-in-law recently had a baby, and we want to buy them life insurance as a new baby gift. We think they should buy term insurance, but they met with their agent from whom they buy their homeowners insurance, and he is suggesting they buy whole life. He said it could serve both as a way to invest for college and to provide a death benefit. He did provide a quote for a 20-year term policy with a $500,000 death benefit for each of them, which will cost around $900/year. That’s a little over our budget for an annual gift, but we can handle it for our grandbaby. That same premium for two whole life policies will provide them with a death benefit of less than $75,000. Do you agree with us that the term insurance makes more sense than the whole life policy with the lower death benefit?

I totally agree with you. Life insurance has two major functions: 1) replace the earning power of the family breadwinner(s) and 2) provide liquidity for an estate by guarding against the forced sale of assets to meet cash needs, which may include estate taxes. The two main types of coverage are Term Life Insurance and Permanent Cash Value Life Insurance such as whole or universal life.

Straight term insurance is pure protection; there is no cash buildup. It’s inexpensive because statistics show the odds are you won’t die while you own it. Most term policies end at age 60 or 65. Term insurance provides protection when it is needed at a low cost. Buying low-cost insurance results in more money left in the budget to be invested toward retirement, college education, mortgage reduction, and other financial goals. I like the level premium term policies such as the 20-year policy you are considering as your gift. You pay a bit more in the first years versus an annual renewable policy; but there is no worry about future medical underwriting and you know what to budget. A 20-year level term policy will provide the protection your son and daughter-in-law need until your grandchild completes high school.

“Investment-”oriented life insurance, such as whole life, may have a place in a person’s portfolio if they have already purchased less expensive life insurance for protection. If your son or daughter-in-law opt for the whole life policy and either die before paying off debt and accumulating sufficient funds to meet their financial goals, $75,000 isn’t going to go very far.

They need to get some additional quotes for policies. I went to an insurance company that sells directly to consumers ( http://ameritasdirect.com/) and requested quotes identical to the one you sent, and the total cost for two 20-year term policies was $560.

Holly Nicholson is a certified financial planner in Raleigh. She cannot answer every question. Reach her at askholly.com or P.O. Box 97128, Raleigh, NC 27624

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