The term "life insurance" is arguably a misnomer. "Insure" is synonymous with "guarantee." Life insurance does not guarantee life. In buying life insurance, you are essentially betting that you are going to die while the policy is still in effect. It's not necessarily like betting on a long-shot horse at the racetrack, but you are still essentially betting against your own life. If the odds weren't in insurance company's favour, they'd be marketing gluten-free bagels instead.
We're not suggesting that you don't buy life insurance. If you're 35 years old and the primary breadwinner of your family, the benefits for the well being of your family in the case of your early death can certainly outweigh the inconvenience of monthly premium payments. Whether or not to buy or not to buy life insurance is your decision. It should be done carefully, with consideration given to your current age and health.
Only one thing is really certain when it comes to life insurance. There's a 100 percent certainty that the person buying it (you, for example!) will die. Life insurance is very much about death, but calling it "death insurance" is a little too realistic for some. The actual future benefits at the time of the insured person's death become more uncertain as the purchaser grows older and experiences health issues. Benefits are dependent the age of the policyholder at the time of death.
We're not life insurance experts. But we know its limitations firsthand. Families we work with are often shocked to find that their life insurance settlement arrives sometimes weeks, months and, sometimes even years after the death of their loved one-- long after the funeral is over and a scramble for emergency cash has been made. This adds more stress for grieving loved ones. If you do decide to buy life insurance, it important to know this limitation.
t's also important to be aware that often people buy more insurance than they need. Buyers are often unaware not only of delays in payouts but also the many limitations of their policy, which sometimes increase, along with premiums, over time.
To help you with the "big picture" of life insurance, here are the two major types of policies that insurance companies offer, along with the possible benefits and drawbacks of each.
Term insurance is one popular type of life insurance, and thus named because the purchaser buys the insurance for a specific time period, or "term," such as 5, 10, 15, or 30 years. This type of insurance can offer genuine benefits in case of an untimely death-- so we're not knocking it. If you're under age 50, term insurance is the easiest and most affordable life insurance to buy. But the reality is that term insurance mostly benefits the insurance industry because benefits paid to the beneficiaries of policy holders under the age 50 is low.
Whole Life is the other major form of insurance. It covers you until your death, at no matter what age. It provides death benefits as well as a cash value that builds during the life of the policy. If you find yourself in cash crisis, a portion of the cash value can be withdrawn or borrowed during the life of the policy. Typically, however, you need a medical exam to qualify for whole life. You can buy a policy without one, but it will cost you more. Initially, a whole life policy has higher monthly premiums than term life insurance. But whole life can potentially save you money over the life of the policy if it's in force for a considerable number of years.
A major drawback is that it typically takes 12 to 15 years to build up a decent cash value. So, if you're over 50 and hoping to flee increasing term life rates and the limitations of a term policy it's not a quick solution. Despite its limitations, whole life can be a good choice for estate planning.
Life insurance can provide some reasonably affordable peace of mind, especially for younger to middle-aged folks-- and of course real survivor benefits, at least in the case of an untimely and/or accidental death.
However, for the plus 50 crowd, there are some serious considerations. Among them: soaring rates, policy limitations or cancellation due to health conditions. These issues hardly ensure peace of mind.
Do your insurance-buying homework
It's always a good idea to do your homework on the types of life insurance available, as well as some of the "tricks" of the trade that favour the insurance company and individual sales agent over you the potential policyholder and beneficiary. Be knowledgeable. And don't be pressured.
One of the most common tactics is the selling of insurance as an investment. Experts generally agree that it's not a good deal for consumers. "If you are going to insure your family, insure your family. If you are going to invest your money, invest your money." Don't mix the two. "Buy term and invest the difference." (Nerdwallet)