While the media has devoted increasing attention to personal finance in recent years, one topic remains under covered – life insurance! Ironically, the first story I was ever paid to write was on life insurance. In 1978, when I was enrolled in the journalism program at the University of Western Ontario, I sold a piece to the London Free Press. I still remember the headline: Life Insurance: You Have to Die to Win.
Financial authors tend to recommend the old standby of buying term insurance and investing the difference. That was the stance of David Chilton in The Wealthy Barber, one he has reiterated in his new book – The Wealthy Barber Returns. It’s also the stance I took in the first edition of Findependence Day.
But in the course of revising the book for new editions, I’ve started to reassess that stance. Up until now, I advocated that young families buy enough term insurance that their untimely departure would not inflict undue hardship. I’ve certainly heard of tragic stories of young widows with small children who had to face life after the unexpected death of the family’s sole breadwinner. It’s not a fun scenario.
In our own family’s case, we kept a term policy in place throughout most of the time our child grew up. Once all debts were eliminated and a nest egg was built up, we let that policy lapse, although we both have basic group life policies at work that replace two or three times our salaries. But the problem for those individuals nearing retirement is that once you leave your job, you no longer will be covered.
In his new book, How to Eat an Elephant, Toronto-based financial planner Frank Wiginton devotes one of his book’s 12 chapters to life insurance. There he notes that many people are uninsured and “putting their loved ones at risk of financial distress and possibly poverty if something should happen to them.”
In a frank discussion of permanent insurance, Wiginton sees no reason for most people to buy the kind called whole life insurance — except that it benefits the agents selling it, who get juicier than normal commissions. However, he sees some worth in universal life insurance, among them a broader selection of investment options, tax-deferred growth of those investments and the fact that premiums never increase.
Then there’s a kind of hybrid policy called term to 100: since it’s in force until age 100 – an age few will live to see – it’s really another type of permanent insurance. It doesn’t expire the way regular term policies do, and the cost is a little lower than regular permanent insurance.
One idea I never considered when either my parents or my in-laws were alive was taking a life insurance policy out on them. It seems a bit morbid, but it’s certainly a tax-effective way to benefit from an inevitable event sometime in the future.
In short, when it comes to insurance, try to keep an open mind in considering some of the possibilities.
I disagree with the comment that whole life insurance only benefits the agents selling it. If you look at the participating life insurance policies they receive an annual dividend that may be used in various ways such as increasing the death benefit, access cash for a loan etc. Some policies also have limited premium payment such as a 20 pay which you no longer pay the premiums after 20 years and your policy is still enforced. Also, this type of policy allows you may take a vacation from paying premiums (depending on the amount of cash built in the policy) and utilize this cash to pay the premiums. Another advantage is this cash value within this type of policy does not decrease once the dividend has been paid out unlike many investments that may drastically fluctuate as we have seen in the last few years. I feel that a steady but modest ROR is better for many investors than what we have been experiencing. Finally a life insurance policy avoids probate so that the government does not take a bigger bite out of your estate. The insurance industry has come a long way and developed products that are much more advantageous to the consumer.