In the last issue, the two basic types of life insurance, term and whole life, were reviewed, and the reason that each type existed was revealed. (There are many types within each basic category, and these will be reviewed in future issues). You should choose the one(s) that will most efficiently help you to accomplish your goals.
As a refresher, life insurance (any type of insurance, really) is a method to transfer unwanted risk to a third party, namely a life insurance company. The higher the probability the transferred risk will result in a claim, the higher the premium the insurance company must charge.
Let’s look at an example. The annual premiums for $1,000,000 of life insurance on a 30 year old male non-smoker in the best risk class at a top rated insurance company are as follows: 10 year level term, $375, 20 year level term, $555, and whole life, $8,620.
These premiums reflect, in part, the probability of the insurance company having to pay a claim. Since very few healthy 30 year olds will die within the next 10 or 20 years, very little has to be charged to cover the risk. However, 100% of healthy 30 year olds will eventually die, so much more has to be charged when the insurance company knows it will have to pay the claim.
Short term needs are most efficiently covered with term insurance, while whole life is the more efficient product for longer term needs. But sometimes long term needs must be covered with term insurance due to budgetary constraints.
It is here that I want to make a very important point. It is much more important to cover the entire need than it is to get the right type of policy. Too often, people are more concerned with the policy type than with covering the entire need. This is in part because the calculated need is larger than they thought it would be.
So to answer the title’s question, you should buy the type of insurance that will best accomplish your goals and fit within your budget. If, in the above example, there is a million dollar long term need but only a $3,000 budget, the whole life policy is not currently an option; the need must be satisfied mostly with term, at least temporarily.