Wednesday, February 17, 2010

Don’t Mix “Dying Too Soon” With “Living Too Long”

I know, I know, life insurance is probably not the topic you really want to think about. Why is it even called Life insurance? I mean, you get accident insurance benefits when you get in an accident. For the most part, you need to die first before you receive any benefit from your life insurance. No one really wants to think about death though. That is probably why they never called it “Death Insurance”. However, for the most part, life insurance’s purpose is to replace the income so that the survivors can continue on without any major financial impact to their lives, thus managing the risk of “Dying Too Soon”. Term Life insurance is considered Pure Death Protection. It offers an income protection for a certain number of years. If you also invest during those years any type of permanent insurance is not needed. (This will be explained in greater detail below with the Theory of Decreasing Responsibility).

Some insurance salespeople will have you believe that you need life insurance for your whole life; a life insurance that has a cash savings account included with it. They will tell you that this will not only help your loved ones if you “Die Too Soon” but it will help you if you “Live Too Long” -- with the cash savings portion. These types of insurance policies are called Cash Value and are usually some form of Whole Life or Universal Life Insurance. This may sound like a great idea however, these products are usually much more expensive and the cash value gets a very low rate of return. For example, a 30-year-old person can buy a $125,000 whole life policy for $100 a month. That same person can buy a 20-year term policy for $7 a month and invest the remaining $93 dollars.

The Theory of Decreasing Responsibility
Insurance should manage the risk of “Dying Too Soon”
IN THE EARLIER YEARS...
  • You may have kids
  • Have a mortgage to pay off
  • You probably have lots of debt (credit cards, student loans, car loans, etc)
...so you need lots of income protection, but you don't have much money saved.

Investments should manage the risk of “Living Too Long”
IN THE LATER YEARS...
  • Your kids grow up and probably move out of the house
  • Your mortgage should be paid off
  • You shouldn't have too much debt to pay (hopefully all your loans are paid off and you have taken control of your credit card spending)
...so you probably don't need much income protection or any life insurance, but you better have money!

When you are young, you may have young children to support, a new mortgage payment, and many other obligations. But you haven't had the time to accumulate much money to retire on. This is the time when the death of the breadwinner could be devastating and when you need coverage the most.

When you are older, you usually have fewer dependents and fewer financial responsibilities. Your kids grow up, the mortgage is paid up or almost paid off, and many routine payments such as loans have disappeared. As a retiree, you no longer need to protect your income for future obligations. Plus, you've had years to accumulate wealth through savings and investments. At this point, your need for life insurance has reduced dramatically and you have cash to see you through your retirement years.

What it all comes down to is that most people want to accumulate money for a secure retirement and life insurance is simply a way to protect your family until then. Of course, individual circumstances may dictate special needs.

The Money Message:
  • Never Bundle Life Insurance (Dying Too Soon) & Investments (Living Too Long) in the same product!
  • Every legitimate consumerist will tell you “Cash-Value” Life Insurance is a flawed concept
  • Buy “Term” Life Insurance, invest the savings in an IRA mutual funds, and implement the “Theory of Decreasing Responsibility”
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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