Getting life insurance advice these days is simple. There are hundreds of people in your life, in your family or at your work that are willing to shower you with opinions on the subject. These same people also give you advice on restaurants, cars, hotels and where the best beach parking is located. Unlike decisions on beach parking, life insurance decisions have a drastic impact on financial planning and your future. This is why it is so important to obtain life insurance advice from a professional who can recommend the best policy type after listening to the details of your situation. This information is worth thousands of dollars to you over the course of the policy life.
Where can you find the best advice? The best advice can be found from a website like this one; a brokerage website that is not looted by web advertising and cross sold by every financial instrument known to man.
-Term Life Insurance-
Term insurance is the cheapest most straightforward form of life insurance. The premiums are predictable and the payouts and terms are clearly defined and laid out for you. Your premium dollars go a long way and you can purchase millions of dollars worth of insurance for a fraction of the cost of whole life insurance. The major downside is that when the term expires on your term life insurance policy you may be well into your 50’s and 60’s leaving yourself vulnerable and uninsured. You are able to convert a Term Life Policy to Whole life or Universal Life when the term expires without any medical qualifications, that’s right, no medical qualifications. Because the premiums are so much lower than a whole life policy, you are able to save away more retirement money and make other investments. With the right financial plan, your term will expire when the mortgage is paid, the kids are out of college and your nest egg has been established. At this time in your life, the need for millions of dollars of life insurance is greatly diminished as your retirement will already be executed. Of course there are other intricacies to worry about such as estate taxes and trusts, but we will leave that for another blog entry.
-Whole Life Insurance-
The best advice when considering whole life insurance is “DON’T BUY IT!” Fundamentally, it’s a guaranteed payout no matter when the person passes away and there is “cash value” associated with the policy premiums which can be borrowed against. Every month a portion of your premium payment gets deposited into a cash account, and the other portion pays for the death benefit/face value. Some brokers and agents will try to pitch it as an investment vehicle or retirement plan mixed with a life insurance policy.
The major problem is that insurance companies have fees and charges that eat away your annual returns in the attached cash account. The fees and charges make it nearly impossible to justify the outrageously high premiums you pay for the related death benefit. Also remember, the cash value isn’t 100% liquid, you must borrow from the cash value at a pre-determined interest rate, making the policy even more unattractive. Some people do however love the security of a permanent policy that will payout no matter what. Let’s face it, there are a small population of people out there that can benefit from a policy like this, otherwise it wouldn’t be sold and offered by insurance carriers. If you are extremely wealthy and planning an estate, whole life may be of some benefit to you. A typical way of utilizing a whole life policy is to use a large lump sum of money as a one-time premium payment. That lump sum will get a guaranteed rate of return, some policies qualify for a dividend that adds to your return, a death benefit and all gains escape the capital gain taxes. This is one of the only scenarios I would recommend a whole life policy. Another scenario would be to with guidance from your estate planning attorney, CPA and financial advisor. If they determine a need for a whole life policy to protect your heirs from estate tax liabilities or other estate plans; I would have no problem with that.
Whole life insurance is only one form of permanent insurance; other types are Universal Life and Variable Universal Life. These types will be covered in another blog entry but the major difference is that whole life require you to make payments to your cash account or the policy will cancel, where the other types give greater flexibility to how much and to where you invest your premium dollars. Having greater flexibility over the cash account and death benefit allows you to adjust your premiums and payouts as your financial needs change over the course of your life. Investment options in these other types range from stocks, indexes, cash or many other options. This allows you to accept more risk and either achieve greater returns or take greater losses.
-The Bottom Line-
When it comes to purchasing life insurance my advice is this…use it for LIFE INSURANCE…not an investment vehicle. Purchase a 30 year term life insurance policy; you can purchase a rather high death benefit and be a proactive investor with the extra money you WOULD HAVE SPENT on a Whole Life or Universal Life policy and achieve a much better result.
Life insurance can be game changer for families. In the event of an untimely death, your family can continue their lives unchanged or can be faced with economic hardship or bankruptcy. Be sure that you get proposals from a broker/agent with no biases and be wary of attempts to steer you one way or another before giving you the facts.
-Jacob Pullen, CIC-
Pullen Family Insurance Agency
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