Tuesday, January 12, 2010

What's Wrong With Your Life Insurance

Most people don’t plan to fail, they just fail to plan. We’ve all heard this cliché before, but it’s true. Most families spend more time planning their two-week vacation than their entire financial future. I wouldn’t ponder that any longer than it takes to read the sentence.

Most families don’t plan because they don’t understand how money works. We pay our bills each month and do our best to prepare for the future. But the truth is, there’s only so much money to go around and creating a financial game plan on our own can be overwhelming. Not to mention most financial services companies charge $500.00 and up just to put a plan in place. That eliminates most middle-income families leaving them alone to figure it out for themselves.

Knowledge is power -- another cliché, however, also very true. This article will arm you with some valuable information to help you plan your financial future more effectively.

Life Insurance is one of the most important financial instruments many of us will ever own; although, it’s one of the most hated -- ranked up there with death and taxes. What thoughts do you conjure when I say “Life Insurance”. Usually, they are thoughts of a sleazy salesman wearing a cheap leisure suit with one long strand of hair wrapped around his head.

Nobody likes to talk about it because it helps us to remember that we are only mortal. However, just imagine what would happen to you and your family if the breadwinner of your family were to pass on. How long could you survive without their income? Would you have to get one or more jobs? If you have young children, who would watch them while you worked? Would you move back in with mom and dad? And god forbid, welfare? If you do own life insurance, do you have the right amount? How would you even know?

Most families, who are smart enough to realize they need life insurance to protect the breadwinner’s income in case of an untimely death, don’t have enough coverage. Almost 70% of middle-income Americans are not only underinsured, but they are over-premiumed as well. Why? Because they don’t understand what it is they’re being sold. They blindly trust the salesman and then store away the policy to collect dust for the rest of its life. This article will demystify the different types of Life Insurance and why you should have one over the other.

It’s actually quite simple. There are basically two types of Life Insurance -- Cash Value and Term. Cash Value goes under the guise of many names such as: Whole Life, Flexible Premium Life, Variable Life, Universal Life, and on and on and on. Basically, Cash Value mixes a savings element along with your life insurance. Term, however, is pure protection. There is no savings element. It is for a specific period of your life (hence “Term”) and then it ends.

Probably by now you’ve figured out which one you have and are asking the next question, “Do I have the right kind of life insurance?” For about 99.9% of Americans, Term Insurance is the right product. Term is usually 30-70% cheaper. According to The Wall Street Journal Guide to Understanding Personal Finance, “fully half the cash value policies written are dropped within the first seven years. This means the coverage has been very expensive because high commissions and other fees have limited the amount of cash that could accumulate during that time.” SmartMoney perhaps said it best: “If you’re thinking about permanent life insurance as an investment, forget it. The management fees will eat your returns alive.”

Not only that, but the interest earned on a Cash Value policy is typically only 3-5%. With inflation around 4%, you’re losing money, not making any. Buy Term and invest the rest! With Term Insurance being 30-70% cheaper, it gives you the power to invest the savings into a Mutual Fund like a Roth or Traditional IRA and possibly earn 8-12% over the long term.

In a Cash Value policy, when the primary insured dies, the spouse or beneficiary will usually only receive the death benefit (amount of coverage you paid for), not the cash value – the cash value usually helps to pay the death benefit. And, if you have a loan out on your policy, the company would deduct that from your benefit. By buying Term Insurance, it gives you the power to invest in mutual funds, which, over the long-term, will far outpace a Cash Value policy. And, when the primary insured dies, the spouse receives both the investment and the death benefit.

If Cash Value is so bad, then why do more families have it then Term? That is because Cash Value Life Insurance is sold to you rather than bought by you. Cash Value policies are much more expensive because the commissions paid to the salesman and company are much higher. If you made a living just selling Life Insurance, would you want to sell the least expensive kind or the most expensive kind? Of course, the most expensive kind because then you’re commission will be higher.

Hopefully by now I’ve got you dusting off your old policy to see which kind it is. Sometimes it’s hard to tell. Make sure you sit down with someone who doesn’t just sell Life Insurance; someone who won’t charge to help put together a financial game plan for you and your family; and someone who will take the time to educate you, because remember knowledge is power.

I'm so excited to share this information with you. If you have enjoyed the information or feel that it would benefit someone else, please share it. If you have any questions or comments, please feel free to contact me.
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