I recently ran across a blog article from a certified financial planner. In the article he described a situation where a 28 year old man with $5,000 in credit card debt and no heirs was sold a $200,000 whole life policy. The financial planner mentions term life as the best solution in this situation. However, his analysis relies on too many assumptions, including an assumption that disability will not occur. According to the US Centers for Disease Control and Prevention (CDC), 1 in 4 adult Americans will suffer from disability. The financial planner picked the cheapest term policy he could find when doing his analysis. The cheapest term policies typically don’t include living benefits. A living benefit provides an income stream to insureds if they become disabled. Cheap term policies may also lack valuable riders like the waiver of premium for disability rider, where the insurance company pays premiums for a disabled insured. People who become disabled are often unable to pay premiums, so living benefits are critically important. Don’t automatically go with the cheapest option.
I will agree with the financial planner that whole life wasn’t the best solution, but term life wasn’t either. A better solution would have been indexed universal life. With this type of policy, the insured could have paid the minimum premiums for a short time while he was paying down credit card debt. After the credit card debt is paid off, the insured can increase his premium payments (universal life offers flexible payments).
Another problem I have with the analysis is the assumption that sufficient funds will be available after a term policy expires, therefore a new life insurance policy won’t be needed. Even with careful financial planning, there’s still a chance of not having enough money. At the very least, people should fund their final expenses with a permanent life insurance policy. I’m not talking about a large policy; just something large enough to cover end of life expenses. If you don’t like the idea of paying premiums for the rest of your life, there is a special type of policy called limited pay whole life that allows you to pay off a policy in 10 years. After 10 years there are no more payments to make, and the policy stays in force forever.