Alternatives to Life Insurance

by Laura Agadoni

Many people need life insurance and do not have it or say that they need more than they do have. According to "Smart Money," more than half of Americans say they need more life insurance. But many people may not need life insurance at all; they have just been ingrained by society or convinced by insurance salespeople that they must have it. If you have no dependents and if you have enough money set aside and enough assets to cover your funeral costs and your debts, but you are not concerned about estate taxes, you may not need life insurance. If you do have dependents, you need to have a plan to provide for them, but it does not necessarily need to include life insurance.

Retirement Savings

Whole life insurance, an investment product that builds cash value you can borrow against if you need to, is expensive, might not be worth the cost and usually is not, according to "Smart Money." Insurance salespeople generally claim that whole life is an excellent way to plan for retirement because it is a forced savings plan. The reality is that you usually have better options than whole life insurance to save for retirement, especially when you consider the fees and commissions you pay for this type of insurance. If you are concerned about retirement savings, consider an IRA or an employer sponsored plan such as a 401(k), a 403(b) or a 457 plan.

Savings Accounts and Other Investments

If you are smart about your savings and investments, you do not need whole life insurance, but you might want to buy an inexpensive term life policy in case you should die before your investments reach your goal. After you have just enough in your checking account to pay your bills and to avoid paying any fees, save the rest while getting the best rate possible. This might sound obvious, but many people leave their money in savings accounts when they could see better returns in higher yielding certificates of deposits or money market funds.

Return of Premium Life Insurance

Term insurance is a good alternative to whole life insurance because it is less expensive. The way it works it that you take out a policy, usually anywhere between 10 and 30 years. If you die during that time, the policy pays off; if you don’t, you get nothing. Return of premium insurance is a type of term life insurance that pays if you live past the term of your policy. The premiums for ROP insurance are higher than they are for term life -- anywhere from 30 percent to three times more -- but if you outlive the policy, you get all your money back. You would need to do some number crunching to determine whether you would do better with ROP insurance or whether you would be better off investing the extra money it costs to invest your excess premiums elsewhere, such as a mutual fund. One big difference is that your refund amount is guaranteed with an ROP; this is not the case with a mutual fund.

Credit Card Balance Insurance and Prepaid Funeral Contracts

If you do not have dependents but you want insurance to cover your debts, you can take out insurance from your credit card company or lending institution to pay off the outstanding balance. Funerals are expensive. If you do not have life insurance that will cover that expense, you can prepay your own funeral. Once you choose a funeral home, you can arrange the type of service and casket you would like, and you can pay for it through installments or as one lump sum. If you don’t like that idea, you can open a Totten trust. This regular bank account allows you to designate a “pay on death” inheritor.

Life Insurance as a Way to Avoid Estate Taxes

An important exception to the general guidelines on life insurance applies to households with high net worth. One reason many individuals and couples with substantial assets include life insurance in their financial plan is to avoid estate taxes. As of publication, up to $5 million may be transferred from an individual upon death without triggering any estate tax. But estate tax laws may change in the future, and the taxation percentages above the protected amount can be significant -- up to 55 percent. A carefully examined insurance plan may enable an individual or couple to shield their wealth from estate taxes. In most cases, the policy should pay benefits to an irrevocable life insurance trust in order to realize tax benefits.

About the Author

Laura Agadoni has been writing professionally since 1983. Her feature stories on area businesses, human interest and health and fitness appear in her local newspaper. She has also written and edited for a grassroots outreach effort and has been published in "Clean Eating" magazine and in "Dimensions" magazine, a CUNA Mutual publication. Agadoni has a Bachelor of Arts in communications from California State University-Fullerton.