Is permanent or whole life insurance enough “forced savings”?
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“Forced Saving” refers to all the automated withdrawals you have set up to save for the future, such as withdrawing a certain amount from each paycheck and transferring to your 401 (k), your savings or other retirement account. Since the money is automatically withdrawn, you don’t have to worry about putting it aside.
Because permanent life insurance policies include a cash value component, they are sometimes considered a type of forced savings. But the point is, life insurance and savings accounts are different products that serve their own purposes – and you should include both products as part of your larger financial portfolio, not one or the other. other.
What is permanent life insurance?
All permanent life insurance products have a death benefit and cash value that grows with a tax deferral. Although whole life insurance is used synonymously with permanent life insurance, whole life insurance is actually a type of permanent life insurance.
Permanent life insurance lasts until you die, an average of 110 years, which is why it is more expensive in the early years of the policy, but the older you get the cheaper it becomes. According to Mark Williams, CEO of Brokers International, âIn the early years of overpayment, the cash value placed in the policy earns interest and you use that amount of money to offset the cost of the insurance when you are over. age.”
Permanent life insurance is different from term life insurance, which covers a period of 10, 20 or 30 years. If you die during this period, your beneficiaries receive your death benefit. Because term life insurance has no cash value and expires, it is much cheaper than permanent life insurance.
The big difference between the different types of permanent life insurance policies is how they manage the cash value. Whole life insurance differs from other types of permanent life insurance because it guarantees the exact same payment for the entire term of the contract. The cash value of the whole life insurance is invested with the life insurance portfolio. Other permanent life insurance products, such as variable life insurance, have cash value invested in the stock market.
Due to its cash value component, permanent life insurance can function as an investment and wealth building tool. You can cash in cash value for things like paying your children’s school fees, financing a business, or buying a second home. Some financial planners have also suggested that permanent life insurance is a good tool for bridging the racial wealth gap.
Most people use the cash value to fund retirement, providing monthly income when they stop working.
A good financial plan includes both savings and life insurance
Some have suggested that consumers simply buy
and invest the rest in the stock market. However, some permanent life insurance products are invested in the stock market, and the big downside to term life insurance is that it expires.
Term life insurance is like renting a house instead of owning it because it expires after a certain time and must be renewed, usually at a higher rate. Permanent life insurance is like the equity in a house because of its cash value. With permanent life insurance, you can start with a smaller death benefit and increase it over time while gaining cash value.
Some financial planners recommend a combination of permanent and term life insurance.
For example, let’s say you have $ 200,000 in permanent life and $ 300,000 in term for 20 years. After 20 years, the term life insurance policy wears off, but you have earned a cash value on the permanent policy of $ 200,000. And if you can’t afford a permanent life insurance policy, you can purchase a term life insurance policy that can be converted to a permanent policy.
And when it comes to investing, Williams says you should maximize other investment plans like your 401 (k) before using permanent life insurance as an investment tool. (But if you don’t have access to a qualified plan like an employer-sponsored retirement account, permanent life insurance is a good tool.)
Williams says you should have a reason for buying life insurance because you are paying for it. In other words, your financial situation should dictate your need for life insurance.
And don’t forget that your life insurance needs change with age, and you’ll need to factor in children, marriage, divorce, retirement, and aging parenting.
To maximize the benefits of life insurance, it is wise to include a financial advisor, accountant, and estate lawyer in your decision-making process to ensure you have the right coverage that adapts to your changing circumstances. your life.