03 Sep
Posted by author as Index Funds, Insurance, Investing
For those of you who have life insurance, and for those of you who are looking to buy life insurance for the first time, here is a fair warning from your faithful Money Crasher’s host. It’s easy to get ripped off, just like every other insurance product on the market. The problem with life insurance, is that the actual product differs, and each one yields a different commission amount for the agent selling it to you. There are only so many ways to slice auto, homeowner’s, and health insurance. Agents can up-sell you on them by offering bonus coverages for extra premium, but the product is essentially the same. Life insurance does not work this way. Allow me to explain:
Term Life Insurance
This is the kind of life insurance you want to buy. Buy a level term of 10, 15, 20, or 25 years. This is the most basic life insurance product, and it is the cheapest and most effective. For instance, you buy a $500,000 policy for 20 years, and you pay an annual premium each year to keep the coverage. if you die in that time period, the beneficiary is paid out the policy limit. If you don’t die in that time period, you can either buy another term policy or stop paying the premium and you receive nothing. It’s that simple, and for a young individual in good health, you’ll pay less than $600 a year for a ton of coverage.
Whole Life and Universal Life Insurance
This is the crap I’m talking about that life insurance agents and bad financial advisors will try to sell you, because it helps pay for their BMW parked out in front of the office. Whole Life and Universal life offer a life insurance policy with an investment product attached to it. It’s term insurance with an investment account attached to it. These are sometimes referred to as “cash value” life insurance products, because the policy actually carries a cash value. You pay a premium, and some of it goes towards the life insurance product, and another portion of it goes toward the investment account. The cash value of your life insurance grows over time, sort of like a retirement account. The only problem is that it’s a HORRIBLE investment product. I don’t care what the agent tells you about the performance of their product over the last few years. The fees associated with these products is outrageous, and they will eat away at the money you put into it. I would never put my retirement money into a cash value life insurance policy, because it’s not designed to be a retirement fund, even though agents and advisors will sell it and package it that way.
Who Should Buy Life Insurance?
I would advise elderly couples with older children to consider saving their money from the premiums they would pay for term insurance. Obviously, the older you get and the more your health deteriorates, the more you’ll pay in premium with it’s a term policy or a whole life policy. You would be better off putting the money you would pay in premium, into an investment account such as a balanced mutual fund or an index fund.
How Much Coverage Should You Buy?
The rule of thumb is to buy 8 to 10 times your household income. So, if you’re family brings in $50,000 a year, then you should buy about $400,000 to $500,000 worth of coverage for a 20 to 25 year term.
Buying life insurance is essential to a sound financial plan. You must take care of the worst case scenario in your life, and there is no worse case than dying. No one wants to think about death in their younger years, but as the saying goes, “the only certainty in life is death and taxes”. Meet with an agent that you can trust and ask about their term life policies. You owe it to your family to protect them in case of a tragedy.