Insurance
Part 6a: Life
By
Keith Bunn Jr.
September
16, 2012
I have said it many times on Facebook,
Twitter, and even on here
that having Life Insurance is extremely important if someone counts on your
income to survive! And yet 30% of
Americans don’t have it.
The purpose of Life Insurance is to replace income due to
death. But the big question is, what kind do you get? The market is flooded
with all kinds of different types of policies and it’s hard to figure out which
ones are the good ones and which ones are bad. So let’s go over them.
Term
vs. Cash Value
There are generally only two kinds of Life Insurance
policies out on the market today, Term Insurance and Cash Value Insurance. Cash
Value can also be called Whole Life, Universal Life, or Variable Universal Life.
Term insurance is always called Term. The differences between the two are HUGE.
1.
Term:
Term
Insurance is for a specified time or term. If you have a 10 year term policy,
you only have the policy for 10 years. 20 year term policy, you only have the
policy for 20 years, etc… it has no savings accounts built into it and it is
much cheaper than the Cash Value policies.
2.
Cash
Value: Cash Value insurance is a continuing policy meaning, as
long as you don’t cancel the policy and keep paying the premiums, you will have
the policy as long as you live. It cost much more than Term policies because it
has a savings (cash value) account built into the policy.
Looking at the two types like that, it’s almost like a no
brainer on which one is the best kind to get. In fact, a lot of insurances companies
that sell Cash Values polices compare the two like this. Getting Term Insurance
is like renting a home, whereas Cash Value is like buying a home. Again, kind
of like a no brainer. Let’s look at it a different way.
Let’s say a healthy 30 year old male buys a $250,000,
Cash Value policy. His monthly premiums are $178, which includes paying into
the cash value portion. By the age of 50, the cash value will have built up to
$34,483 and by 70 it would have reached $124,041. Not too bad huh?
Now let’s say the same guy buys a $250,000, 20 year Term policy
instead of the Cash Value. His monthly premiums are $13. That’s a difference of
$165 per month. And then let’s say he took the difference and invested it himself
into a decent Growth Stock Mutual Fund that gives him an average rate of return
of 12%. By the age of 50, that investment would have built up to $164,859 and
by 70 it would have reached $1,960,603. WOW! Almost $2 million! That’s a huge
difference!!
Both examples the guy was spending $178 per month but the
outcomes are totally different. It looks like it’s not so much of a no brainer
after all. Now let’s get really crazy!
Let’s take the same guy, but instead of buying a $250,000,
20 year Term policy, he buys a $500,000, 20 year Term policy, twice as much. His
monthly premiums go from $13 to $21. And he invests $157 per month instead of
$165 into a decent Growth Stock Mutual Fund that gives him an average rate of
return of 12%. By the age of 50, that investment would have built up to $156,866
and by 70 it would have reached $1,865,539. The end result is not quite as much
but you have to remember that you have doubled your policy amount.
$250,000 + $1,960,603 = $2,210,603 compared to…
$500,000 + $1,865,539
= $2,365,539.
Now if this doesn’t convince you that Term Insurance is
an all-around better buy, maybe this will. Taking the $250,000 Cash Value
example from above, let’s say the guy dies at 70 years old. How much do you
think the beneficiaries get? They get the face value of the policy, $250,000.
You want to know where the $124,041 went that he had in the cash value portion
of the policy? The insurance company
keeps it! Where in the Term policy, you get the face value of the policy,
the $250,000 or $500,000 in our example plus what was invested. How does that
sound?
The only people that think these Cash Value policies are
any good are the ones who sell it because they make a lot of money doing it. Money
Magazine, Fortune Magazine, Kiplinger’s Magazine, and Consumer’s Report all say
that Cash Value policies are the most expensive and less useful forms of life
insurance.
“The
right type of life insurance can be summed up in a single word: TERM.”
-Smart
Money Magazine-
Because this topic is so big and it’s causing this blog
to be too long, I will talk about this a little bit more next week in Part 6b. I will discuss who should get
life insurance, how much should you get, what to do if you already have a Cash
Value policy and want to change to Term, and what gimmicks NOT to get. I hope you all find this insurance series insightful and
would really like to hear your questions as well your input.
The
insurance cost and cash value based on the average of four actual quotes.
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