Why Should You Purchase Term Life Insurance?
You may have heard the adage “buy term life insurance and invest the difference” being tossed around within the industry, but what does it actually mean, and how does it affect you?
Term Life Insurance
To understand what term life insurance will do for you, you first need to understand what it is, and what sets it apart from other regular forms of insurance. Simply put, term life insurance is a type of insurance policy that allows you to have pure life insurance coverage but only for a certain period of time and payable upon the death of the policyholder. This differs from whole life insurance in that you will not get any money back out as soon as the policy has matured at the end of the insurance period.
Buy Term Life Insurance and Invest the Rest
“Buy term and invest the difference” is simply referring to a strategy of buying term life insurance and using the money that you save from purchasing a cheaper premium to invest into another investment vehicle. So not only are you saving money by buying into term life insurance, but you may stand to make money through your invested savings. By investing the money that you save, you may actually obtain higher returns than what a regular whole life policy would have afforded you.
When you are buying a whole life insurance policy, you are actually paying for two different objectives, which is why it is the more expensive option. The first objective is obviously your insurance, but the second objective is a savings plan. A part of your monthly premiums goes toward paying for your insurance and the rest goes into the investment portion so that you can have some positive returns at the end of your policy.
The “buy term life insurance and invest the difference” strategy is one that is well worth exploring and considering. Rather than giving all of your money to a single company so that they can try to protect two different interests, you should consider buying term life insurance from one company and investing the savings into another. It certainly makes more sense for you to be able to invest in whatever investment vehicle you wish, rather than depending on your life insurance company to do the work for you.
By opting to do the investment yourself, you can invest in whatever investment vehicle you prefer, and you can also choose the best available fund manager rather than depending on whoever your insurance company has on staff. If you should ever happen to want to change what investment vehicle you are using, you can be rest assured that the switch will never have an effect over your insurance coverage since two different companies are handling the two different facets.
In short, the best reason to invest in term life insurance rather than a traditional whole life insurance is because it will allow you to have more choices, more control, better returns at the end of the day, and a chance to have undisturbed life insurance coverage. With so many perks, why would you go for anything less?
The average American has a policy for about three times his or her annual income. If you want your family to be able to survive without touching the principle, keep in mind that your survivors usually can withdraw about 5 percent each year from the earnings on a sum of money. After that 5%, you begin dipping into the principle. So, for example, if your annual salary is $70,000.00 and you own a policy worth the average 3 times, your face value would be $210,000.00. Your beneficiaries would be able to withdraw $10,500.00 per year before using the principle amount. Would this $10,500.00 be enough to support your survivors?
Add up all other income sources, such as your spouse’s salary or pension, and any Social Security or other government benefits for which they would be eligible. Your life insurance policy should help close any gaps while also allowing your family to maintain their current lifestyle.