You’ve probably heard it said that the least expensive way to buy life
insurance is to purchase term insurance. That is the type of life insurance
that you pay for a period of time, such as 5, 10, or 20 yeas (term, get
it?). The policy will pay your beneficiary a stated amount of money upon
your death, so long as your death occurs during that term of years the
policy is in force. With respect to monthly outlay of cash, term insurance
is definitely the most inexpensive way to go.
The alternative is to purchase cash value life insurance such as variable
universal life, which is commonly referred to simply as VUL. VUL has one
major advantage over term in that it never ends. In other words, regardless
of whether you die one year, 10 years, or 50 years after you buy the policy,
it will pay your beneficiary an amount of money. So, why doesn’t everyone
purchase VUL instead of term? Because, term is cheaper. Right? Actually, in
most cases probably not.
Here is a question for you. It is undeniable that the monthly premium
required for a term policy is less than the monthly premium required for a
VUL policy with the same amount of insurance. However, if you are not
certain when you are going to die (and most of us this side of the X Files
fall into that category), you’ll have to purchase a rather lengthy term
policy, say at least 25-30 years. Over that time, the cost of that term
insurance is going to escalate – probably quite substantially. By contrast,
the VUL policy premium will remain the same. Additionally, the term policy
is a lose-lose proposition. If you die during the policy term, you
(obviously) lose. But, if you don’t die during that policy term, you also
lose, because your insurance contract terminates.
But here’s the best part. A VUL contract is made up of both a term insurance
premium and an amount that is invested into sub-accounts (think of them as
mutual funds). The investment gain (cash value) in the sub-accounts is not
subject to current IRS taxes, which means that you can enjoy tax-free
investment growth. Additionally, the actual cost of the insurance contained
in the VUL contract is deducted directly from the sub-accounts each month in
the form of a tax free transaction! And the final benefit is that if you
reach retirement and have a substantial accumulation in your VUL, you can
withdraw, or borrow against it as a supplement to your income – possibly tax
free!
So, the next time you hear someone promote the savings of term life
insurance, do the math. You may end up spending far less on the higher
premium VUL than on the inexpensive term insurance.
To find out which type of life insurance is in your best interest, talk with
your financial advisor. And if building a financial plan that reflects your
values is important to you, log onto www.MoneyAndValues.com. This
state-of-the-art service is free and will help you identify investment and
insurance products that match your personal values.
Stephen R. Bolt is the author of the book Money for Life, and Your Money,
Your Values. To learn more about values-based financial planning log onto MoneyAndValues.
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