Do you care about someone enough to spend your hard-earned money on a monthly life insurance premium?
Because a life insurance policy isn't really for you. It's for the people you care about... after you die.
The money from life insurance goes to those who depend on you right now for a safe way to live. This can be gone in an instant.
Life insurance is money when you need it most, but you don't have to pay income tax on it or talk about it.
Buying a life insurance policy is hard because life insurance isn't a simple subject.
Most people don't really understand how it works or who they can trust enough to buy from.
And there are a lot of businesses and salespeople trying to get your attention.
This article will help set the record straight about a big misunderstanding about term life insurance. Also, I'll tell you what many experts say is the best-kept secret in a life insurance policy.
Buy term and invest the difference is a phrase that is often used by people, like many life insurance agents, who have no idea how bad it can be if it is followed.
The main idea is that once you reach a certain age, like 55, 60, or 65, you no longer need life insurance.
Your kids have probably finished school and are doing well making their own money, right? And you and your spouse are living well on your retirement savings and Social Security.
On the surface and to a simple-minded person, this might make sense.
Now, it's easy to find problems with this theory, but let's focus on what's really wrong with this situation.
We are living longer than ever before. We may not be able to enjoy it much because of our health, but we're still holding on.
The people who sell life insurance know this better than anyone else. Most of them now use age 115 as a factor when figuring out the cost of a life insurance policy.
You hear about retired people who have to work at McDonald's or Wal-Mart to make ends meet. Have you ever talked to older people in an online chat room and seen how worried they are about running out of money before they die?
A lot of these older people are scared to death. And what about the millions of people who were born between 1946 and 1964?
If you buy life insurance wisely, it could save the lives of the people you love most.
Now, I'd like to clear things up. Term life insurance is fine with me. Over the past 24 years, I've sold things worth millions of dollars.
What bothers me, and what I think is wrong, is when fake information is used to sell term life insurance.
Let's use a simple example.
A 35-year-old man in great health who doesn't smoke can buy a term life insurance policy for $500,000 for about $700 per year.
The premium will always be $700 for the next 30 years. Some companies will be a little less expensive than others.
The person who says you should buy term insurance and invest the difference would compare this to a $3,650-per-year, $500,000 whole-life insurance policy. Again, some companies will be at the top and others will be at the bottom.
In theory, you can invest $2,950 each year for 30 years. I say "theoretically" because you would never invest $2,950 every year in the real world.
Not the same way you would pay a premium for life insurance.
What tells me this? Call it what people are like based on a lot of experience.
But let's give you the benefit of the doubt and say you actually invest according to this hypothetical plan. How much money will you get back in 30 years? 5 percent ... 8 percent ... 10 percent?
Also, this question opens up a whole new set of problems. The mind behind investing. But we won't talk about that fight right now.
Let's say, for the sake of argument, that you get a rate of return of 8% each year for 30 years. This adds up to 360,920.41 dollars.
So, you're now 65 years old and have $360,920.41. What, though?
When you turn 66, your $500,000 term life insurance policy will be worthless because the annual premium will be $21,180.
That's right, you read it right! It goes from $700.00 to more than 21,000.00.
It's $31,430 at age 70. It's $52,970 at age 75.
You will never, ever pay this high price. The problem is that you're not dead yet.
You paid $21,000 over 30 years for a $500,000 life insurance policy, even though it was likely you wouldn't die during that time.
In most cases, you will die around age 80, give or take a few years. The investment account of someone you care about still won't be worth $500,000.
She will also have to pay income tax on the gains from the investment. Don't forget that the money from life insurance isn't taxed as income.
Allow me to say it again. I'm not against term life insurance, as long as it's bought with an eye toward how things will really be in the future.
If your term life insurance policy is from a well-known company with a wide range of options, you will have plenty of chances over the 30 years in our example to change it into something more permanent.
Keep in mind that your age determines how long the guaranteed level premium on a term policy will last.
If you are over 50, you might not be able to get a guarantee for more than 10 years.
So, what is the life insurance policy's best-kept secret?
It is a universal life insurance policy that guarantees the death benefit no matter how well the investments do.
Universal life insurance is the most flexible policy you can buy. The premium is more than whole life, but less than term. There are a lot of them on the market, so be careful.
If you have to buy term insurance because you don't have enough money, make sure you buy it from a company that also sells universal life insurance.
This lets you slowly switch from term to universal coverage with the same company over the length of the term guarantee.
When your budget allows, switch from term to universal.
A word of warning. Long-term interest rates play a big role in how well universal life insurance works.
Because they've been depressed for a long time and are likely to stay that way, you must get the universal life insurance with a guaranteed death benefit, even if they get better.
Here's an example with our man who is 30 years old. The premium for a universal life insurance policy with a face value of $500,000 is $2,871 a year. This is different from the $700 term and $3,650 whole life premiums that have already been talked about.
Let's say you really do decide at age 65 that life insurance isn't important. By then, you would have paid a total of $86,130 in premiums.
Like the term plan, down a rat hole? Nope!
At least $85,501 would be given back in cash. Based on the competitive interest rates that have been added to the policy over the 30 years, it could be well over $100,000.
When you buy the right kind of universal life insurance, the death benefit is guaranteed for as long as you need it. You can also get your money back if you want to cash it in.
When you use the best-kept secret in a life insurance policy, you can get the best of both worlds.
