Life insurance can provide a sense of security that your family will be financially protected after your death, but that peace of mind doesn’t come cheap.
For many people, buying whole life insurance, which offers protection for a lifetime, is too expensive, but less expensive term life insurance, which provides coverage for a period of time, isn’t enough. To find a happy medium of cost and coverage, consumers turn to bundled life insurance, which offers a combination of term and permanent life insurance.
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“The main benefit of a combined policy is that it allows for a lower premium,” says scott witt, actuary and fee insurance advisor at witt actuarial services. A combined life insurance policy begins as a combination of term and permanent coverage and eventually becomes fully permanent insurance. Dividends paid on the policy are used to convert the term portion of the combined life insurance policy to permanent life insurance.
According to insurance experts, deciding whether or not you need a combined life insurance policy depends on individual needs. For example, if you have young children and want to make sure they are protected during college, a term life insurance policy may be appropriate. however, if you have a child with special needs who will be dependent into adulthood or a spouse who is unable to work, a whole life insurance policy may make more sense.
Term insurance typically costs much less than whole life insurance because there is a term limitation on the policy. With a combined life insurance policy, the total premium can be cut in half or more compared to a whole life policy. “Compared to buying whole life insurance, it can be much cheaper,” says Kevin Finneran, vice president of life insurance product management at MetLife. “premiums can be reduced by 60%. premium levels vary from company to company and the age of the insured, but it tends to be cheaper than buying the full amount of whole life insurance.”
According to Witt, when determining how much combined life insurance coverage is needed, it’s best to take a needs-based or earnings-based approach. The needs-based approach takes into account all the expenses your dependents would need if you were to die tomorrow. for example, you may want to pay the mortgage, pay for the children’s college, and cover household expenses so that the survivor does not have to get a job. this figure will determine the amount of life insurance needed.
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Using the earnings method, calculate how much you’ll earn if you work for 20 more years (taking raises and taxes into account) and that number will be the amount of coverage you need. In both senses, the idea is to reach an adequate amount to really take care of your loved ones.
While a combined life insurance policy is less expensive than a whole life insurance policy, there are risks. Since the term portion of a combined life insurance policy is converted entirely by dividends or investment earnings that the insurance company generates with your money, there is a risk that if the dividends are too low, you may end up with less coverage or a higher premium down the road. Still, experts say that choosing the right insurance company will mitigate some of your risks.
Experts recommend using an insurance company that has a good financial history and a strong history of paying dividends. It’s also a good idea to have the plan reviewed by an independent advisor who has no reason to buy the policy. “The difference between a great policy from a great company and just a good policy from a good company is staggering,” Witt says.