Sunday, September 23, 2012

Insurance Part 6b: Life

Part 6b: Life

By Keith Bunn Jr.
September 23, 2012


Before we start today, let’s review last week’s blog. Last week we learned that there are only two main types of Life Insurance, Term Life Insurance and Cash Value Life Insurance.

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.

3. Better Deal: We also learned that even though Cash Values polices look good from the outside, when you look into the polices deeper and compare the math between the two, we found that Term Insurance is really a better deal for four main reasons.

·         Cost Less: Term Insurance is extremely cheaper than Cash Value for the simple fact you are not funding a savings account inside the insurance policy.

·         More for your Buck: You can get 2 to 3 times the coverage in a Term policy that still doesn’t cost as much as a $250,000 dollar Cash Value policy.

·         More when you Retire: If you just take the difference in what the two polices cost and invested it yourself in a decent Growth Stock Mutual Fund, by the time you retire, you’ll have millions of dollars invested instead of hundreds of thousands.

·         When you Die: If you have a Cash Value policy and you die, your family only gets the face value of the policy, NOT the cash value portion. The insurance company keeps that part.

How much to get

Now that we know what to get, the question is, how much do you need to get. And the answer to that is, you need to get a minimum of 10 times your annual income. So if you make $40,000 a year, you need $400,000 coverage in a 20 year level Term policy and this is why…

Let’s make up a couple named Joe and Suzie Smith. Joe and Suzie are a 30 year old couple that have two young kids that are 3 and 4 years old. Now if Joe is making $40,000 per year and the family is dependent on his income and he has a $400,000 20 year term policy in place, if unfortunately Joe dies 5 years later, Suzie will receive the $400,000. If she took that money and invested it in a decent Growth Stock Mutual Fund that gave her an annual rate of return of 10%, she would get $40,000 per year off those investments. Joe’s income is now replaced and the family will survive.

Now what about Suzie? If Suzie works, then she should also get 10 times her annual income in a 20 year Term policy. But if she doesn’t work, if she is a stay at home mom, then there should be anywhere from $250,000 to $450,000 of coverage on her then. The reason is, stay at home moms have an economic value too. From maintaining the household, grocery shopping, cooking, taking the kids to the doctors, to soccer practice, etc… If you had to hire someone to do that, it would cost a lot of money to do it. So don’t forget stay at home moms!

Who doesn’t need Life Insurance?

Let’s use Joe and Suzie again for this example. Let’s say Joe doesn’t die and he lives all the way to the end of the 20 year policy. If Joe and Suzie do what most Financial Coach’s say to do, in 20 years they will have become debt free which will probably include their home, they have an emergency fund established of 3 to 6 months’ worth of their household expenses, their 3 and 4 year old kids are now 23 and 24 and should be out of the home and living on their own, and Joe would have been investing 15% of his annual income for retirement into decent Growth Stock Mutual Funds that, instead of giving them an annual rate of return of 10%, they were making 12%. Now if Joe died 6 months after his 20 year policy expired, would Suzie be OK? Yes. Why? Because Suzie is debt free, has a paid for house, she has about $20,000 to $30,000 saved in case of emergencies, and over a half a million dollars in a retirement fund. Suzie will be OK. The same goes for Joe if Suzie dies. You see, they have become self-insured due to good financial planning.

Now if you’re single and no one is dependent on your income to survive after you die, then all you really need is a simple life insurance policy through your work that pays out enough to bury you. But if you want to get a Term policy, you can. There’s nothing saying you can’t.

You don’t take out big life insurance policies on your children. Most children don’t bring in an income, they normally cost money. So to put Term policies on your children is an over kill. A simple rider policy attached to your life insurance policy through your work should be good enough to bury them, God forbid.

What do you do if you have Cash Value Insurance and what Term?

If you have a Cash Value policy and you decide you want to get out of it and buy some Term instead, Make sure you have the Term insurance in place first. Because if for whatever reason, while you had the Cash Value policy, you became uninsurable because of some health issues, (meaning you can’t buy any new insurance), at least you still have the Cash Value policy to cover you when you die.

If that’s not the case, once you have the Term policy in place, you can then cancel the Cash Value policy. Also, you need some life insurance outside of work. Again, if you only have your work policy and you become uninsurable because of some health issues and then you lose your job, now you no longer have life insurance.

Bad Insurance plans! Don’t Buy Them!

1.    Credit Life and Disability: This is an insurance plan that is bought when you bought something on credit; it pays off that item if you were to die or be disabled. This type of policy is anywhere around 50 – 100 time the cost of what Term insurance will cost you. Not a good plan!

2.    Cancer and Hospital Indemnity: Don’t be pulled into this bad plan because of your fear of cancer. Your health insurance covers cancer. By buying both, you are doubling coverage and that is always a bad idea when it comes to health insurance because the insurance companies will argue who’s going to cover what and nothing will get paid.

3.    Accidental Death: You’re not double dead when you die by accident. I know these types of policies are not that expensive but you’re nickel and dimeing yourself to death with all these gimmick policies. Put that money towards something better like getting out of debt. Besides, if an insurance company only charges you a couple of dollars a year to cover something, that’s because the coverage sucks!

4.    Prepaid Burial Policies: If you are 40 years old, statistically speaking, you have a real good chance of reaching 80. And if you bought a prepaid policy that cost you no more than $3000 all the way to the day you died, that would have been $355,942.39 if you took that same $3000 and invested it into a Mutual Fund giving you a 12% rate of return for 40 years. Don’t prepay anything!

5.    Mortgage Life Insurance: This gimmick policy is kind of like the cancer one. “When I die, at least the house will be paid for!” That’s what people think when they buy this kind of policy. It is all based on fear of the “what if’s”. The only reason you should buy this policy is if you are un-insurable.

6.    Return of Premiums: This policy gimmick pledges that if go so many years without ever using the policy, they’ll give you all the premiums back if you just pay a little extra on the policy. If you take that little extra you’re paying on that policy and invest it yourself, you’ll have the premiums back whether you use the policy or not.

Well folks, this blog ended up to be way longer than I wanted but this information is just so important for everyone to know. Be careful, read the policies, do the math, ask for other peoples’ advice and input, and for goodness sakes, if you don’t understand how the policy works or even if it’s just a touch confusing, DON’T BUY IT!! Only buy it when you understand what you’re going to buy. Because insurance is an area where you normally don’t know you were ripped off until it’s too late. Only from knowledge and understanding can you prevent that from happening.

I hope my posts inspire you to look at what you’re doing financially and if needed, make some changes that will cause you to win financially. I also look forward to reading your views on any articles or postings that I may post. For more money news, facts and ideas follow me on Facebook, or Twitter. Thanks you!

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