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What Kind of Life Insurance Policy Do I Need

Yes, I know talking about Life Insurance policies is a real snoozer.  But I’m gonna try and jazz it up just a bit because everybody needs this info and not enough people get it because their eyes glaze over just thinking about it.

Ok, here goes…

 

Why Do I Need a Life Insurance Policy?

You need a life insurance policy because stuff happens.  You need insurance because, let’s face it, when you depart from this earth you’ll be in the cold cold ground.  You’ll be out of a job and no longer making a living to support your family.

Johnny and Molly (your kids) are still going to need braces and a college education.  They will also need a place to stay.  So if you don’t have a paid for house it could be foreclosure time along with mourning an untimely death.

Life will go on without you, and when your piece of the family puzzle is missing, things get can get tougher financially for those you left behind.  A good life insurance policy replaces your income and pays off your debts, making things easier for the family that has to get along without you.

 

Who Needs a Life Insurance Policy?

You need a life insurance policy if you make an income for your family, especially if you have debt.  Age really doesn’t matter in this game.  Even if you’re in your 20’s, you need life insurance if you have a family and debt obligations.

Even if you’re a stay at home spouse without an official income, your presence will be missed.  Especially if you have  kids.  Expenses for childcare, transportation, and other duties that you once performed will certainly increase when you’re gone, so it’s very important make sure those will be covered.

However, if you have no family to take care of, no debt, and don’t want to leave insurance proceeds to anyone else, then you’re probably one of the few that can do without it.

 

How Much Life Insurance Do I Need?

Most experts recommend a minimum payout of 10 times your annual income, even more is better.

“Why do I need so much?” you might ask.  Well you don’t, but your family does.  It takes at least that much to secure your family’s future.  It ensures that, at least in the financial sense, your absence is not devastating.  Remember those braces?  Those things are expensive (I’m a dentist, I know these things).

 

What Kind of Life Insurance Do You Need? How much do you need? All the answers right here 

 

Term Life vs. Whole Life -Which Do I Need?

There are basically two kinds of life insurance, Term life and Whole Life (also known as universal life, permanent life, cash value, and a host of other names).  Here’s a brief description of each:

  • Term Life Insurance–  Term life means you pay premiums for a policy for a set number of years (the term), usually 10- 30 years.  When that term is up, the policy is terminated.  Term life is extremely cheap compared to other types of life insurance.  If you die during that time your beneficiaries get the full amount of the policy you paid the premiums for.
  • Whole Life Insurance–  Whole life, or whatever other term is used, means you pay premiums over your whole life.  This policy is made up of two components (life insurance and a savings/investment account) that are combined together.

For example:   If you pay $100 per month in premiums, about $7 pays for the life insurance and the other $93 is used for investing.  However, all of that $93 doesn’t go to savings or investments because there are very high fees associated with this kind of life insurance.  Because of that you also get very low returns on your investment. Investing in Life Insurance is a terrible investment compared to what you can get with investing outside of a life insurance policy (Click here for more details).

Also, when you die, your family only gets the face value of the insurance policy.  All of the money in the investment side of the policy goes to the insurance company.  For all of these “great features” you also have the privilege of paying monthly premiums that cost about 10 times that of a term life policy.  How’s that for an investment?

I can’t believe that’s even legal!

My advice, DON’T DO IT!!!

 

How Do I Buy a Life Insurance Policy?

You can contact your friends, your uncle, or your cousin.  Seriously, almost everybody knows somebody that sells insurance.

You can also buy it online.  Two of the most popular online insurance companies are Zander Insurance and SelectQuote where you can compare rates and find the best deal to fit your situation.

Either way you’ll be filling out several pages worth of personal information asking about your health and other issues that factor into how risky they think you are to insure.   So if you’re a base jumper or an assistant to a knife thrower, you’ll end up paying more.  You might even be required to go through a medical exam, paid for by the company, especially if you need a high amount of insurance.  So lay off the Twinkies and start Jazzercising a few weeks before and maybe, just maybe, you’ll get a better rate.

Hopefully you won’t die trying.

So to conclude, those are the basics of buying life insurance as I see it.  I sincerely hope you didn’t doze off and bust your nose on the keyboard while reading this, ‘cuz no matter how much you dress it up, life insurance is still boring.

Important, but boring.

This article was written as part of the “Whole Life Insurance Rebellion”, an organized movement of personal finance bloggers to educate consumers about the risks of investing in whole life insurance


Resources:

What if My House is Underwater?

How to Make Your Own Life Plan (Part 6)- Your Legacy

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  • Kurt A Berry

    Whole life insurance is not an investment tool!!!! It is not designed to be that, so please stop comparing whole life to stocks, bonds, mutual funds, etc. Investments are designed to accumulate wealth while insurance is designed to protect income and wealth, just like you described with term above.

    What people miss is that our need to protect income and wealth does not go away at age 65 or whatever age you “retire” at. But once you set up your “buy term & invest the rest” strategy, when you arrive at retirement, very few will be able to continue having insurance due to health status or cost of the policies.

    That is where having a whole life (and not a universal, index or variable life) policy makes sense. Yes, the premiums are higher in the early years than a comparable term policy. But if I bought some (not all – it is OK to buy term in addition to whole life for the right amount of death benefit) whole life insurance from a good company, the death benefit actually grows along with the cash value each year. That increasing death benefit will be with me my whole life and the cost never increases! That is important to consider.

    A term policy for $250K costs about $16 to $26/mth at age 25, but at age 65, that same coverage costs $248 to $420/mth. That is not something that most will want to pay nor even be able to pay at retirement time if they did want it. Very few people actually invest the difference over their lifetime, thus very few really have enough assets to “self-insure”. The reason buying term is so appealing is that the “difference” can be spent on my lifestyle choices like the flat screen TV, the nicer car, the stainless steel appliances, etc. It usually never gets invested. Just look around you at all the people close to retirement age. Is it working for them?

    A whole life policy for $250K at age 25 costs $181/mth. That cost stays the same for the rest of your life (universal, indexed, and variable life can do a look back and then increase your costs at age 65 if there is not enough cash in the policy which the insurance company can manipulate over your lifetime – whole life comes with real guarantees).

    You can also utilize dividends (the return of excess costs each year based on profitability of the insurance company) to help the whole life policy grow in value over time as well as the death benefit (which can help overcome inflation – after all a $250K death benefit today will potentially only have half the spending power 20 years from now and only 1/4 the spending power in 40 years!!). The dividends can also be used to help pay the premiums for you and even pay them all at retirement time if you choose.

    So remember, whole life is not as bad as everyone says. There are always two sides to every story and the good side of whole life is much better than most give it credit. Whole life is for protecting income and wealth not for investing!! So please stop comparing them. Use whole life along with investing and you will truly win the financial game.

  • Chris Huntley

    Buy term and invest the rest is right for most. Terrific article Jason and thank you so much for giving the #wholeliferebellion a shoutout. If you want to crunch the numbers we created a term vs whole life insurance comparison calculator. Check it out: http://www.insuranceblogbychris.com/term-vs-whole-life-insurance-comparison-calculator/

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