By Lewis J. Walker
Young adults starting out in life, especially newlyweds, need insurance. But what kind? As a start, a good term life policy likely is a smart move. Other types of insurance may not be. And as they age, what other varieties of coverage make sense? A good deal of misunderstanding surrounds insurance protection planning.
Consider a couple, basking in the glow of their recent and beautiful wedding. For them, death is an abstraction that seems a remote possibility. But a life insurance agent, a friend of the groom, suggests that as a newly married man he consider life insurance — namely a $200,000 whole life policy. Here’s why that is an unwise strategy.
There are two basic forms of life insurance. Term insurance is pure mortality coverage, paying off if the insured dies within a specified term, usually 10 to 30 years. It has no cash value element, where extra premium is invested and functions as a savings account for the policyholder.
Then there is mortality insurance combined with a cash value element, often referred to by agents as “permanent insurance” and which may be in force for life. This type of coverage comes in various forms. With whole life the insurer pays an annual dividend, based on at least a guaranteed minimum amount to build cash values. With universal life, the insurer pays interest at least a minimum guaranteed amount.
Variable universal life (VUL) builds value based on a basket of separate accounts similar to mutual funds while offering premium flexibility. Obviously if a policy combines cash value with a death benefit, premiums generally are higher — and considerably higher at younger policyholder ages — than one would see on a pure term life policy.
Different types of contracts have uses relative to estate and charitable giving objectives, so one cannot make a blanket statement as to what kind of contract is best. For our newlyweds, 30-year term insurance was the preferred solution.
The primary purpose of life insurance is to protect someone from the economic implications of your death. Of our couple, both worked. What if he died and she was pregnant, or they already had one or more children? As a widow, perhaps with children, what would the loss of his salary mean to her economic security?