Term life insurance or cash value insurance – which is better in today’s financial environment?

America is currently in the middle of one of the worst economic crises since the Great Depression. That’s why families try to find ways to save some extra money. Experts agree that many families make mistakes by reducing or canceling their life insurance policies at a time when protection is most needed. Tough economic times, higher unemployment and an uncertain period of recovery actually put families at greater risk, as it is more difficult for a surviving family to recover from the emotional and financial loss of a breadwinner.

The situation is further complicated by the confusion regarding the types of life insurance policies offered today: Term Life vs. Cash Value Plans. The debate revolves around the pros or cons of buying a cash value life insurance policy (which includes full, universal, variable, and return premium plans) versus buying cheaper term life insurance and using the savings to pay down debt and build investments. The debate has been raging for years but deserves another review as new products are now on the market and attitudes to debt among American households have changed significantly.

First and foremost, life insurance is for protection

The real focus of the debate between Term Life and Cash Value plans should be on what each product accomplishes and at what cost or sacrifice there is for the insured and their beneficiaries. The mathematical equations presented tend to manipulate the numbers to favor the desired outcome of both parties. Life insurance is primarily for protection and having the right amount is the most necessary goal. In addition, an insured person only needs a policy as long as his premature death is a financial burden on his family. Higher cost Cash Value plans (often 8 to 10 times more expensive) are based on the concept that people need policies for their “whole life” as they will always be in debt and unable to meet their family’s obligations comply. These more expensive cash value plans actually perpetuate this concept of “lifetime” debt by reducing the amount of coverage a family can afford when they need it most and by diverting money to low-yield savings plans while many higher credit card and other charges continue. debt expenses.

Insurability, Flexibility and Savings

Term Life plans today offer guaranteed premiums for 15, 20 and 30 years, providing safe and stable long-term options and allowing families to focus on more favorable financial goals during these periods. In addition, the enforced savings and flexibility aspects of bundling all of your savings needs into a Cash Value plan to potentially use for education, retirement, housing, and emergency needs overlook much more beneficial plans. Programs such as 529s and ESAs (Education Savings Accounts), along with business-related retirement plans, 401k’s, Simple IRAs, and especially Roth IRAs, all offer much better investment opportunities, can be set up as forced savings plans, and offer tax benefits and rates of return much higher than that of a life insurance policy. .

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Many proponents of these plans will emphasize that term life insurance is temporary, as it can expire and eventually leave the insured’s family unprotected. In addition, the savings accounts that are part of Cash Value plans are forced savings that provide flexibility to meet the different needs families will face in the years to come. In the past, these types of statements may have been accurate, but with the introduction of so many new products and tax-friendly investment options, the benefits of these types of plans have diminished considerably.

Is term life insurance the only answer?

Term life insurance isn’t the answer to every family’s financial problem…but it doesn’t try to be. It allows families to focus on getting the right amount of protection at the lowest possible cost and to focus their money on more important and productive strategies, such as building an emergency fund, paying off debt and seeking high-quality investment options to build wealth. This is the real value of term life insurance that is often overlooked by all the other sales tactics used in the life insurance industry. The real shortcoming of Cash Value plans is that they aim to be all things to all and in turn dilute their effectiveness. America is a society burdened by debt and struggling to balance our finances and responsibilities. Cash Value plans weaken a family’s ability to overcome these challenges by perpetuating debt under the guise of safety and security.