One of the first questions people encounter when purchasing life insurance is whether they should buy term or whole life.
Advisors will often recommend to buy term and invest the difference. This is likely due to two things: either they know nothing about life insurance or they know nothing about you. The need for life insurance does not stop at calculating when dependents will be able to provide for themselves. Rather, one should consider all the ways that a whole life insurance policy can be used for personal, estate, and business planning.
First let’s lay out the case for when term is appropriate. Someone who is merely concerned with providing for their children or spouse in the event of an untimely death may only need term. It is an effective way to plan for that basic risk, but there are many other factors that life insurance can account for when a whole life policy is purchased. These factors include but are not limited to: business owners who need succession planning, personal “banking” by borrowing against the policy, assigning the policy as collateral for a mortgage, and wealthy families who need estate planning.
When first purchasing a policy, many individuals will brush these factors off, saying that they can always buy more insurance later, but that is missing one of the most important aspects of life insurance, your “insurability.” Being older almost always increases one’s expense to insure, and life insurance may become unaffordable. Additionally, what happens if later on in life, your medical condition deteriorates and you’re outright denied coverage? You now are deprived from the tax efficient benefits that a whole life policy could have provided to address the previously mentioned factors. In this context, whole life insurance offers the best long term solution for factors beyond income replacement for dependents.
So how exactly can a whole life insurance policy be used to provide living benefits that addresses unforeseen life events? It’s mostly up to the policy’s cash value. A whole life policy’s cash value grows with interest and dividends tax free. This cash value can be borrowed against, and that loan can be applied for a myriad of uses. An example is using it to inject cash into a business when times are scarce, preventing the selling of the business or part of the business to keep it afloat. Another use would be pledging the policy in the purchase of a mortgage, affectively using it as collateral for the home. Additionally, if you become temporarily disabled and cannot work, you can take a loan out on the policy, allowing you to recover while still fulfilling your financial obligations.
The person who has the planning wherewithal and specific needs mentioned earlier would significantly benefit from a whole life policy in comparison to a term policy or multiple term policies. When the need for quick access to funds arise, you simply borrow the money from your policy and then only have to pay yourself back, at a much more favorable rate than from a bank. When considering purchasing a life insurance policy, one should consider factors other than simply the death benefit, as it can be a versatile tool in your financial portfolio. While term life is specifically designed for the purpose of providing benefits when someone passes away, whole life insurance can be used for almost any unseen event during life.
Richard S. Bernstein, CEO of Richard S. Bernstein & Associates, Inc., West Palm Beach, is an insurance advisor for high net worth business leaders, families, businesses, municipalities, and charitable organizations. An insurance advisor to many of America’s wealthiest families, he is a writer, trusted local and national media resource and expert speaker on estate planning and health insurance. Visit his website at www.rbernstein.com. To read more of his reports — Click Here Now.
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