A Beginner’s Guide to Life Insurance
If you have a family, or someone else that depends on your income to live, life insurance is an absolute must. Too many families without life insurance lose one of the parents, and then the other parent has to work full-time and barely scrape by, it’s almost a financial death sentence. Even if you’re a stay-at-home mom, you need good quality life insurance, because if you’re not around to take care of the kids, there’s going to be added cost of daycare and much more. If you have a family, you absolutely need life insurance. Here’s some advice to help you find good quality life insurance?
How Much Life Insurance Do I Need?
You’ll want about eight to ten times your annual income in life insurance. The reason for this is that the goal of life insurance is to replace your income. If your spouse put ten times your income into a quality mutual fund that earns 10% each year, the investment are now making as much as you do when you’re working, and have a lot of money left over once the kids are on their own and no longer need your support.
What Type of Life Insurance Should I get?
Always get term life insurance. With term insurance, you’re paying for the cost of the insurance, nothing more, nothing less, and that’s all you need. whole life insurance products include a savings program within the life insurance, but when you die, the amount of cash value you have in your policy disappears, and your family is only paid the face value of the policy. In addition, you’re not getting a very good interest rate on the money that’s in your cash value insurance, and you’re paying a lot higher fees than if you had just gone out in term insurance.
If you took the difference between the term insurance and the whole-life insurance, and put that money into a solid mutual fund, you would make the amount of money in your cash value several times over. And if the unfortunate were to happen and you were to die, your family actually gets to keep the money in the investment, rather than having the cash value of a whole-life policy disappear.
How Can I Shop for Life Insurance?
You can either look online, or visit an independent insurance agent. Usually going to an independent insurance agent is the best way to go, because they can compare a lot more insurance companies than you can and often get you a better deal. If a better deal happens to come up on life insurance, they’ll let you know.
If you don’t want to go out and visit an independent insurance agent, you can comparison shop online by visiting places such as IntelliQuote and SelectQuote. You just have to fill out a few simple forms and the websites will automatically find you the best deal on term life insurance.
When Can I Get Rid of My Life Insurance Policy?
You won’t need life insurance forever. If you happen to get divorced or be in a situation where no one else is dependent upon your income to live, you no longer need life insurance. You only need life insurance when someone depends on your income to pay for their basic expenses. If you were a single parent that now has two adult kids, you probably don’t need life insurance.
You also don’t need life insurance if you have a lot of money in your investments and would be able to live easily if one of the spouses weren’t around any more. You would essentially be self-insured, and not need a sudden wind-fall of money if the father or mother in the family were to pass away.
Who Doesn’t Need Life Insurance?
If you’re a single individual and no one is dependent upon your income, you don’t need life insurance. If you die, your estate will pay for any debts you have, and then you’ll get buried. That’s all there is to it, you don’t need to worry about leaving your relatives a huge sum of money if you were to die, there’s just no reason to do it.
You should also not get any life insurance on your kids. Gerber frequently promotes their cash-value insurance for children on television, and you should never buy these products. Children don’t need any life insurance, because they do not create any income for the family.
December 3rd, 2008 at 8:36 am
Hello,
I have a couple issues with your posting here. I am a licensed insurance agent and financial advisor. I disagree with some of your statements here and you have also omitted many reasons why people would need insurance.
First off, the cash value in a whole life policy does NOT disappear. If the client were to take out a Universal Life policy, the cash within the plan is paid out, tax free, to the beneficiary on top of the face value of the policy. Also it should be mentioned that life insurance provides some key features that mutual funds do not.
1. tax free growth of the funds where mutual funds are taxable each year.
2. Creditor protection – funds within a life insurance policy cannot be seized unless they were unlawfully hidden. Mutual funds and any unregistered investment can be seized.
A reason this would be handy? If you were to become severly ill and the govt has to cover your care, they will come after every asset you own to cover the bill, including your house! They cant touch a life insurance policy.
3. Tax free at time of death – All the funds that are paid from an insurance policy are tax free, they bypass probate completely. If you have a mutual fund investment, the govt is going to get approximately 25% of that money as all capital gains taxes are due the year of death.
Some other reasons why someone might take out a Universal Life policy is for estate planning reasons. An individual or couple may have a sizeable estate at the time of their passing which then incurs a large tax bill in the year of passing. Because there is no concrete way to determine what that tax bill will be or when it will happen, we setup a Universal Life policy sufficient to cover the current tax burden and then fund the policy so it will grow with the tax burden.
Most estates are not liquid or have limited liquidity so there is a need for immediate cash at time of death. Too many families lose their estates or recieve it for pennies on the dollar because of insufficient planning.
You stated that when you die your estate is sold then the bills are paid and you are buried. What would that family do when the debt is larger than the estate?
Guess who gets that nice little bill?
I recently had to quote a 63 yr old couple on a fixed income what it would cost to cover their debts with a term coverage. Imagine what their faces looked like when I told them it would be $320 a month!!!
You stated that the return you get on your cash value is alot less than if you invested in mutual funds. Well this is also untrue. You can invest your funds in an insurance policy almost identical to how you would with mutual funds. Clients can even handle their own investments if they choose.
You stated that children should not have insurance policies. I disagree with this as well. There are alot of people out there that do not qaulify for insurance due to health reasons. If these people had insurance in place prior to their declining health they would have been able to cover their responsibilities.
I will give you an example. I have setup a universal life policy for my 4 yr old son. I setup a 50k policy with a rider that allows him to add 50k units as he needs them without having to provide proof of good health. When he gets a family of his own, he will be able to have the level of protection he needs without worrying about any health condition he may or maynot have. This policy costs $20 a month and is a sound investment in my sons future.
Dont get me wrong, there is some sound advice here but every client is different and has differing situations. While buying term and investing the difference is a good strategy, it is not always the best one.
As always, everyone should sit down with a qualified financial advisor to determine what is the right course for them and their families.
The best advice you can give anyone is to get educated. Know your options and obstacles then make an informed decision.
Cheers,
Vince Dempsey
December 6th, 2008 at 10:09 am
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