Life & Health Insurance/LIFE INSURANCES

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Question
I NEED TO KNOW THE DIFFERANCE BETWEEN WHOLE LIFE INSURANCE AND TERM LIFE INSURANCE, WHICH IS THE BEST FOR MY FAMILY AND I, I AM 27, AND MY HUSBAND IS 28 AND WE HAVE 3 SMALL CHILDREN. ALSO FOR MY MOTHER -IN-LAW WHO IS 50 WITH DISABLILITIES.  IS THE GLOBE LIFE INSURANCE THAT YOU GET FROM THE MAIL GOOD INSURANCE? WE ALSO (MY HUSBAND) HAS A ANNUITY ACCOUNT THAT IS BASICALLY FOR RETIREMENT PURPOSES, AND THAT FOR NOW IS THE ONLY "RETIREMENT" THING WE HAVE FOR NOW, CAN YOU SUGGEST OTHERS THAT MIGHT BE APPROPRIATE FOR A FAMILY WITH LITTLE MONEY?  THANKS    DEANA

Answer
Dear Deana,

Thank you for your questions. I will answer from simple to detailed.

Globe Life is NOT your best choice. In fact there is only one "mail order" life insurance marketer that I respect, and that is Gerber Life. Globe is over priced and a weak builder of value. Gerber, on the other hand, is as competitive as many agent-offered companies.

Retirement annuities can be qualified (the traditional IRA), Roth (premiums after tax, payout tax-free), and non-qualified. At your ages you and your husband can contribute $3,000 each this year into either the traditional or the Roth IRAs. Assuming that you are in a low tax bracket, I recommend that you put as much as you are allowed into the Roth IRA.

The weakness of both the traditional IRA and the regular non-qualified annuity is that at some point income taxes will be paid by whoever withdraws the value. However sometimes these two annuities do serve a good purpose, if you need to reduce the amount of your reportable income.

Life insurance premiums and Roth IRA contributions are made with after tax funds. Thus there is no tax savings up front. But both the Roth IRA and the Whole Life policies have the strength of untaxed growth. At retirement you can take distributions from the Roth tax free, and from your Whole Life policies withdrawals up to your cost base (the sum of life insurance premiums paid) tax free and loans thereafter untaxed.

Both Whole Life and Term Life are good products. Mathematically, Whole Life with any competitive company in the long run proves to be a better buy than Term Life. However, for most people your age the appropriate amount of life insurance may be too difficult to budget if it is in the form of Whole Life.

For this reason I often recommend a combination of Whole Life and Term Life. And if necessary Term Life only.

Whole Life insurance is designed to provide insurance for as long as you live with a presumed level premium. Most competitive products have some means to adjust the premium in order to permit the insured to share in the positive experience of the insurance company.

Due to this construction, these policies build equity, just like the equity that you would have in a home that you may have purchased. This equity is often mistakenly called "cash value." It is no more "cash value" than the equity in your house. Access to this value is exactly the same as that of your house.

You can sell the house or you can borrow against its equity. In the case of the Whole Life policy, you can sell the policy back to the company or you can borrow up to what would be the surrender value of the policy. (Some policies do have equity that can be withdrawn up to a certain point.)

Term Life insurance rarely has equity. As a result either the premums will increase with age, or the death benefit will diminish over time. Also, should there be a missed premium after there has been a change in health resulting in a loss of insurability, that policy would be terminated without value, and it would be permanently lost.

Therefore, in answer to your question, "What is best for your family?" I recommend Whole Life if you can; Term Life if necessary, or a combination of the two, if you can compromise.

Willard R. Brumbaugh, LUTCF
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Willard R. Brumbaugh, LUTCF, CSFP

Expertise

I can handle questions concerning life insurance, it`s tax implications, how to determine what is appropriate, and how it fits in one`s estate and retirement planning.

Experience

For 2 1/2 years I was an expert on AskMe.com, where for most of that time I was ranked #1. I have been a moderator (instructor) for the Life Underwriters Training Council. I have been licensed since 1969. Organizations I belong to: National Association of Insurance and Financial Advisors - California and the Inland Empire Estate Planning Council. I hold the professional designation of Life Underwriters Training Council Fellow.

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