Term Life Insurance vs. Cash Value Insurance
Term life insurance offers life insurance and nothing more. It is, simply put, an insurance policy. You pay premiums to provide adequate cover in the event of your death. As you near retirement, you no longer have the massive financial commitments that you previously had – College tuition fees, buying a new house and other expenses which everyone faces in a lifetime. Close to retirement, you probably have a very good idea of what you will need, it is substantially less than what you would have needed 10-20 years ago and you now have the resources to pay for it. Point is that the period of the term life insurance policy is set to expire in tune with this crossover phase, when you are newly free of massive responsibilities which need cover. This is what term life is meant to do, and any associated savings or benefits from purchasing a term life insurance policy are purely a secondary factor.
On the other hand, cash value policies take the core concept of term life insurance and enhance it with increased savings, tax benefits and a longer period of active coverage (usually whole life). A cash value plan is a long-term investment, which is likely to show positive and satisfactory results over a period of 10-20 years. You also need to work with the insurance company to set up the savings plan, identify specific investments out of the choice offered and pay for administrative and management fees. Your premium will be divided into two parts – One going towards covering your life and the other towards adding to the cash value and a bit for paying related expenses. This has multiple benefits in the sense that it can offer you a post-retirement nest egg, or offer significant death benefits to your heirs. Please note that the withdrawal of funds is taxable.
Choosing which type of insurance you need is not a simple matter, and greatly depends on your individual situation, your dependants and your resources. If we limit our discussion to a comparison of term life vs. cash value insurance, the choice becomes a bit easier. If you haven’t maxed out your 401(k) or IRA contributions, then you can simply buy a term life and make additional contributions to your employer sponsored retirement plan or your individual IRA. If you have already made the maximum allowable contributions, cash value insurance offers an attractive tax deferred option to invest your funds while enhancing your life coverage at the same time.