When we think or talk about insurance, we typically relate it with a cost or treat it as an expense. This is true for health insurance, homeowner’s insurance, car insurance, or even term insurance. And most of us try to minimize our expenses, and we should. The common thought process flows as follows: If I buy term insurance, I will minimize my cost. However, there are several other factors that you need to consider to calculate the true cost of term insurance. For example, the opportunity cost of premiums and the compounding tax consequences for your other savings and investments.

Most people feel that they need insurance before age 65, not after, when their kids are out of college, their home is paid for, and they have enough in the bank for retirement. So they buy 20- or 30-year term insurance to cover them until they feel they no longer have financial obligations. This seems logical—until you understand the living benefits of life insurance.

The concept of buying term insurance until age 65 is called the “survivorship need,” which is one very compelling reason behind purchasing insurance. But there are other important purposes for life insurance, such as covering federal and state estate tax if you fall into the estate-tax bracket. Even if you do not fall into the estate-tax bracket, insurance can be a tremendous savings vehicle through the cash value build-up inside the policy. For example, whole life insurance (one type of permanent insurance), when purchased from a solid insurance company, has an internal rate of return of 5% on average over the long term. Additionally, by law, an insurance contract is tax-deferred, so you are not paying any taxes on that growth. And under the current tax law, you can take out a distribution from a permanent policy by way of a loan that is also not taxed.* This savings adds an additional 2% to 2.5% onto your rate of return. Lastly, the opportunity cost and monetary savings of the term insurance premiums that you did not pay adds another 2% to 2.5%, so your total annual rate of return is around 10%. Furthermore, this 10% is achieved while avoiding stock market volatility, and if you should pass away prematurely, you are passing on all of the death benefits to your beneficiaries without any income tax or estate tax burden (if your policy is structured in the right manner). There are very few investment vehicles that will provide this kind return. One final aspect of permanent insurance is that the cash value or account value accumulations inside the policy are protected from many kinds of creditors in most states.*

BeamaLife.com is an industry-recognized website offering such counsel along with the best whole life insurance rates. Please call (866) 972-3262 to speak with our whole life insurance specialists or complete a whole life insurance quote request now!

In summary, if your current lifestyle does not allow you to spend the additional dollars on whole life insurance, you should buy term insurance to cover the survivorship risk. However, if you are putting money away at the end of the month in some type of savings or investment vehicle that is making less than 8–9%, it is definitely worthwhile to consider a permanent policy, specifically a whole life insurance policy.

*The information contained in this post is provided with the understanding that it is not intended to be interpreted as specific legal or tax advice. Neither BeamaLife nor any of its employees or specialists are authorized to give legal or tax advice.