Life insurance is a crucial part of financial planning no matter your stage of life.
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An up to date, sensible policy can keep your family from financial disaster if you die, but deciding which type is best for your life situation can be tricky. Both whole and term life insurance policies allow you to lock in the same monthly payment over the life of a policy (at your choosing), with a lump sum to be paid to the beneficiary upon death. But whole life insurance policies also come with stock, bond and money market investments, and some tax advantages.
Life insurance policies get more expensive as we age, and those over age 50 should keep close track of when their policies expire, advises Scott Page, CEO of life settlement provider Lifeline.
You should reevaluate your policy every few years to make sure it still fits your lifestyle. For instance, a spousal death or divorce changes the need for protection, and grown children may lessen the need for insurance coverage, according to Page.
Experts say there are often better ways to invest funds than in expensive, whole life insurance policies, and that a term life insurance policy tends to make the most financial sense if:
You seek only a death benefit. When the insured dies, the policy pays the face amount to a beneficiary, says Philip Cioppa, managing principal and chief investment officer of Arbol Financial Strategies. You can buy term life insurance for periods of one to 30 years, and the sum is guaranteed.
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On the other hand, the cash value in a whole life policy builds up slowly and might not yield a reasonable return unless it is held for a period of time. “It's better to have adequate coverage through a term policy than not enough coverage in a whole life policy,” adds John Thornton, executive vice president of Amalgamated Life.
You are younger than 50. Term policies are almost impossible to get after 65, says Thornton, and are pretty cheap before age 50.
You have made better, cheaper retirement investments. Whole life insurance policies build cash value you can borrow against, but can come with high fees and costs.
Term life insurance policies tend to be more affordable, says Chris Hogan, lead financial counselor of The Lampo Group. “You could put that money into a growth stock mutual fund and receive a better return for your money.”
Your health situation could change. With most term agreements, you can upgrade or change to a new policy without a medical exam, says Thornton. Individuals older than 50 and still working could opt for a term policy with a critical illness protection component, which offers lump sum payment upon the diagnosis of a critical illness as well as for organ transplants where 30 consecutive days of hospitalization are involved, he adds. The life benefit is restored two years after the individual returns to full-time employment for double protection.