term insurance, then speculation, then investment,
then maybe whole life insurance
You may need very little or no life insurance.
To be direct, all insurance is an expensive way of
protecting what you can not afford to protect alone.
If you are young and without responsibilities, or
old and with plenty of money, life insurance (except
perhaps for burial expenses) may be a needless expense.
Make up your own mind before you talk to a life insurance
Life insurance, your will, or your trust can also
be used to create an enduring legacy. Beneficiary
gifts and endowments may be made to schools, organizations,
and charities - consider this when modifying your
Let's look first at life
insurance products that are sold as
investment vehicles. These financial products pay
the salesman great commissions, but they provide
you with little benefit. A term life insurance policy
will provide you with far more life insurance coverage
- but pays little if any commission.
I was going to grab some comparative numbers, but
the old line companies that push expensive whole
life insurance want a rep to talk to you. These following
numbers may be way off, they are as I remember them
from a brief period after college when I was a licensed
life insurance salesman - I had to quit when I realized
the only way to do what was best for the client was
for me to starve.
I should also add that life insurance is very important
in many instances. If you need to pay a huge premium
to be talked into protecting yourself - do it.
If not find and act on the information yourself -
and get far more coverage for far less money.
particular note is mortgage insurance often
required by housing lenders, the lenders should
accept a much cheaper term policy with the loan payoff
listed as a beneficiary.
When I sold Life Insurance, a healthy
man age thirty could expect to pay about one dollar
a year for one thousand dollars of term life insurance
coverage. One hundred thousand dollars of life insurance
coverage - one hundred dollars - per year. (not a
lot of room for commissions in that)
A whole life policy can be priced a hundred
different ways and structured thousands of ways;
universal life - term plus annuities - investment
life. Think of a solid comforting word and it will
probably have been applied to a life insurance product.
I had one client that had been sold a ten thousand
dollar whole life policy. He paid close to three
hundred dollars a year for this life insurance coverage
- and he was healthy and less than thirty years old.
With a term life policy he could have had a quarter
million dollars of life insurance. (we did make sure
he was approved and had the new policy before he
chose to cancel the old one.)
Here are some standard objections a life insurance
representative will make to the above:
- Yes, but the term life policy will go down in
coverage or up in price as time passes.
This is true, but total cost will remain far smaller.
Except for some estate planning issues, life insurance
is mostly needed for young families, to decrease insurance
latter in life as other assets grow may be a reasonable
- Ok, but there is no investment in term life,
what will you do when you retire?
Hopefully you learn to speculate (check out this site),
and retire well before your policy matures. If not
your uncommitted money sitting in a bank is probably
going to yield more than tied up in a whole life policy.
Buy the best life insurance policy at the best price
- make the best speculations separately - do both under
your own counsel.
- Sure, if people would save -- but most people
need a built in expense to force them to save.
If you are in this position, have
10% of your gross pay removed
before you see it
- for a standard or Roth IRA - a 401K - or for a stock
purchase plan. If you think you can't do that - why
would you want an expensive life insurance policy to
do it for you? That is a policy you will probably cancel
when the bill arrives.
- In case of emergency a whole life insurance policy
will have built up a cash value available to the
Lets look at this one a bit closer. That cash value
is supposedly your money, right? Why if you ask for
it does it cost you interest? Why if you borrow it
does the value of your policy decrease by the borrowed
amount? If you die why is your cash value kept by the
insurance company - not passed through to your heirs?
To illustrate this last one. A ten thousand dollar
policy may slowly grow a cash value - that is the built
in retirement feature. Lets say after twenty years
your policy has built up two thousand in cash value
- supposedly your retirement fund.
If you borrow the two thousand:
- you pay interest on the borrowed amount
- you still pay your full policy premium
- if you die your heirs only get eight thousand
- if you pay it back - your heirs will get ten
thousand dollars, not twelve thousand
In essence- you are increasingly self insuring. The
insurance company has over charged you and pretended
to refund part of the over-charge as "cash value."
If you live to the life insurance policy's retirement
age they will hand you this over-charge as your "investment
return." Assume however the amount of your cash value
is $9990.00 a year before an age 70 retirement. If
you die - the insurance company will toss in ten bucks
and hand your heirs a check for ten thousand, your
cash value was just part of the policy.
Notice that you were still sending in that same payment
at age 69 -- in effect for ten dollars of life insurance
With term life insurance that charge is up front and
understood. If you want to get insurance while you
are sure you qualify - get an inexpensive policy that
allows you to convert or add to it latter. (In the
competitive life insurance market it may pay to shop
for a new term life policy every five or ten years.
If you do find a much better deal in the future, be
sure to own the new policy before you cancel the old)
As an aside: Insurance and retirement plans may
be used for planned giving. Declare Bastiat
Free University or other
of your philinthropic intent as a beneficiary
- this is revocable. There aer many other otions
available, you may want to seek professional legal
and estate planning advice to assist you in establishing
promised future donation) that satisfies your philanthropic
desires. Giving without reservation is one indication
of true wealth.
Let's expand this discussion back up to investment
When that investment adviser, financial analyst, insurance
salesman, hedge fund manager, broker, or other finance
professional calls -- they have a list of "financial
products" available -- some with high commissions
and management fees, others that might fit you perfectly.
Which do you think they want to talk about?
An important speculation rule is to do your own
research, contact your own suppliers. If they call
you -- hang up.
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