Choosing the right life insurance policy is an important decision.
The term "traditional insurance" is reference to a specific category of life insurance called "traditional or permanent whole life," which is defined by its promise to provide coverage up to age 100 at a fixed annual premium regardless of the insured's future health, advancing age or rising insurer costs. These policies also furnish a savings feature termed "cash value" that accumulates on a tax-deferred basis and may be borrowed by the policy owner at any time. Weighing the advantages and disadvantages of this type of coverage against other forms of life insurance, such as death benefit-only "term" policies, makes for an interesting debate.
Protection: Advantages
An individual who is concerned his family may suffer financial loss because of his death may want to lock in the availability and cost of a traditional permanent life insurance contract that will remain in force at a fixed price until, at least, age 100. Those that argue the need for life insurance diminishes with advancing age and the accumulation of wealth, fail to recognize the changing roll of life insurance in later years. It can evolve from an income replacement tool into an asset protection device in estate and tax planning and as a means to shield wealth from creditor attack.
Protection: Disadvantages
The biggest drawback to owning traditional insurance is its high cost. Yet, the greatest risk to a young family with limited financial resources is a sudden loss of income because of the death of a breadwinner. In this situation, a high death benefit, low-cost, 20-year "convertible" and "renewable" temporary level term policy would better serve this couple's needs. Later, if the family situation called for permanent insurance, the term contract could be converted to a traditional policy or automatically renewed at a higher level premium for another 20 years without having to prove continued insurability.
Cash Accumulation: Advantages
Cash value life insurance is not an investment -- it's life insurance. So long as an individual's primary motive is to protect beneficiaries from suffering economic loss, tax-advantaged savings can be a legitimate secondary reason for owning a traditional life policy. Over a long holding period, 20 to 30 years, the average prospective returns on cash values compare favorably with other similar long-term, low-risk financial instruments like government bonds and bank certificates of deposit. At retirement, cash values can be withdrawn or borrowed tax free to supplement income.
Cash Accumulation: Disadvantages
Cash value results from paying premiums year after year that exceed the insurers cost to insure that person's life. In a traditional whole life product, those accumulating cash values gradually reduce the insurance company's risk. When the insured dies, his beneficiary receives the face amount of the policy and the accumulated cash value goes to the insurer. When a policy owner draws on cash value, the death benefit to loved ones is similarly reduced. Unless the risk of economic loss has diminished over the years, using cash value jeopardizes the original intent of the insurance.
