30 Oct Life insurance for children

Photo: Viktor Hanacek for Picjumbo.

 Q: I’m 44, and I have enough term insurance for my family. I also have a $50,000 whole life policy that my mom bought for me when I was a kid. The premiums are about $350 a year. Is it worth keeping? I don’t really need the insurance.

A: Let’s go over the basics first.

Term insurance is meant to protect your family for a specified number of years against an untimely death, and you pay annual premiums for a certain amount of coverage.

If you live longer than the term of the policy, you get nothing. But if you die during the policy, your heirs get whatever amount you signed up for.

Permanent insurance also protects your family against an untimely death, but instead it will cover one’s life for as long as the premiums are paid and the policy kept active, said Edward Leach, a certified financial planner with Highland Financial Advisors in Riverdale.

A type of permanent insurance is what is called “whole life” insurance, which seems to be what you have.

Leach said permanent life insurance is different from term. You’d pay premiums every year and a portion of that premium is accumulated in a type of savings account often quoted on your statement as “Cash Surrender Value.” When buying a permanent life insurance policy, this savings account is usually guaranteed a fixed interest rate or tied to returns of the capital markets, he said.

When you’re deciding what kind of insurance you need, Leach says you should ask yourself: Do you have a permanent need for life insurance – potentially longer than 20 years? And, do you need the insurance policy to help pay for expected future estate tax liabilities upon your death?

If you do not have a permanent need for life insurance and you are considering keeping an old policy, you should ask your insurance carrier what the cash surrender value of the policy is, and then you’ll need to go deeper. Ask about the internal rate of return of the policy, and then see if you could do better in another investment vehicle like a brokerage account.

“Whole life insurance policies are generally more expensive than term insurance and are poor investment vehicles,” Leach said. “Before making the decision to cancel any type of insurance, make sure if you were to pass away there is enough life insurance in place to replace your income.”

He said if you feel you need additional insurance, a healthy 44-year man who is a non-smoker could potentially purchase a $250,000 20-year level term policy for about what you are paying every year for the $50,000 whole life policy.

Alan Meckler, a certified financial planner with Cornerstone Financial Group in Succasunna, said you really need to call the company and ask for an “in-force policy ledger,” and then analyze it.

“I am a firm believer in whole life insurance and if it is from a good company you may very well want to keep it,” Meckler said. “Term insurance is temporary insurance and usually expires before a claim is ever paid.”

But, he says, many whole life policies issued by mutual companies pay excellent dividends and build up tax-deferred cash value, which if needed you can withdraw or borrow on.  And, he said, the death benefit is income tax free to your beneficiaries.

If you’re not sure what to do and you’d like another opinion, consider a free money makeover from NJMoneyHelp.com. For more information, email .