Life insurance should match your needs, budget

There are many different options for life insurance, but in general there are two main categories to choose from: term life insurance and permanent life insurance. They can greatly differ in cost and in the length of time they provide coverage. You should match your life insurance as closely as possible to your needs and budget.

Term life insurance. Term life insurance is the most basic form of life insurance. You choose a specific period of time for coverage, such as 20 or 30 years, when members of your family will be financially dependent on you. If you pass away within that coverage period, your family receives a death benefit.

Premiums for term life insurance cost much less than premiums for permanent life insurance. Term life premiums can save you money and give you more buying power for life insurance coverage.

Permanent life insurance, such as whole or universal life, costs more in part because the insurance itself is combined with a savings or investment plan. However, it may be more beneficial to you to keep insurance and savings/investments separate in your financial plan.

A permanent life insurance policy’s investments may come with higher fees or lower returns than other investment options available to you, and you should always compare fees and returns in any investment decision. Insurance policies offer tax benefits for investments, but so do IRA’s and 401k’s, and retirement accounts give you much more control over your investments.

If you cancel your permanent life insurance policy, you may be faced with a surrender charge, which would decrease the cash value you receive from the policy. Instead of taking a loan from the cash value in your permanent life insurance policy, and paying interest and fees on that loan, you could put that money into a Roth IRA instead, and withdraw your contributions penalty free if you need them in an emergency.

Term life insurance doesn’t pay out a benefit if you survive beyond the policy end date, whereas a permanent life insurance policy doesn’t expire. But if no one will be financially dependent on you after your policy expires, life insurance will no longer be a need in your financial plan. If you chose to combine term life insurance and retirement account savings in lieu of permanent life insurance premiums, your designated beneficiaries will inherit your retirement account after your passing.

Permanent life insurance. If you have family members who will be financially dependent throughout your life and after your passing—such as children with disabilities—permanent life insurance, which does not expire, is something to consider.

In this situation, you should carefully consider all of the options available to you. You can buy term life insurance that is convertible to permanent life insurance down the line, so that you can save on premiums until you have room in your budget for a conversion to permanent life insurance. You can also start building assets in a special needs trust, as you would a retirement fund, and use life insurance as another component of the trust for your special needs child. Financial and legal professionals can help you compare your options and plan effectively for your family’s specific circumstances.

Michael Camacho is president and chief executive officer of Personal Finance Center. He has more than 20 years experience in retail banking and with financial institutions in Guam and Hawaii. If there is a topic you’d like Michael to cover, please email him at moneymattersguam@yahoo.com.

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