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The Best Kept Secret About Life Insurance
By Don Adams
Do you love someone enough to spend your hard earned dollars
on a life insurance premium -- month after month?
Because the real benefit of a life insurance policy isn't for you. It's
for those you love... but after you've gone.
Life insurance is money paid to those who rely on you right now to
provide a secure standard of living. They can lose this in a
heartbeat.
Life insurance is money when needed the most... with no income
tax or publicity.
Buying a life insurance policy is challenging because it isn't an easy
subject matter to begin with.
Most people get confused about how it works and whom they can
trust enough to make the purchase.
And there's a large number of companies and sales agents all
clamoring for your attention.
This article will help to clarify a huge misconception about term life
insurance. Also, I'll introduce you to what many knowledgable
professionals consider to be the best kept secret in a life insurance
policy.
Buy term and invest the difference is a phrase touted by those ...
including many life insurance agents ... who have absolutely no
idea how much harm it's implementation can cause.
The principle theory is you no longer need life insurance when you
reach a certain age such as 55, 60 or 65.
Supposedly your kids have finished school and are doing just fine
earning their own income. And you and your spouse are living
comfortably on retirement savings and social security.
On the surface and to the naive, this might appear reasonable.
Now, it's easy to pick apart this hypothesis, but let's focus instead
on the real problem with this scenario.
We are living longer than ever before. We may not be enjoying it
very much due to poor health but, nevertheless, we're hanging on.
Life insurance companies know this better than anyone. In fact,
most of them now use age 115 has a factor when calculating life
insurance policy premiums.
You hear about retirees who are forced to find work at McDonald's
or Wal-Mart. Have you ever joined a seniors chat room on the
Internet and witnessed the concerns most of them have about
running out of money before they die?
Many of these seniors are frightened to death. And what about
the millions of babyboomers right behind them.
An intelligently purchased life insurance policy can be the saving
grace for those you love the most.
Now, let me set the record straight. I have nothing against term
life insurance. For over 24 years I've personally sold millions of
dollars worth.
What bothers me ... and what I believe to be criminal ... is when
term life insurance is sold under false pretenses.
Let's use a simple example.
A 35 year old nonsmoking male in excellent health can buy a
$500,000 term life insurance policy for about $700 per year.
The premium is guaranteed to be $700 for 30 years. Some
companies will be a little cheaper and some a little more
expensive.
The buy term and invest the difference advocate would compare
this to a $500,000 whole life insurance policy at $3,650 per year.
Once again, some companies will be higher and some lower.
Theoretically, you have $2,950 to invest each year for 30 years. I
say theoretically because in the real world you would never
consistently invest $2,950 each year.
Not the same way you would commit to a life insurance policy
premium.
How do I know this? Call it human nature based on lots of
experience.
But, let's give you the benefit of the doubt and say you actually do
invest according to this hypothetical plan. What rate of return are
you going to make over 30 years? 5% ... 8% ... 10 percent?
By the way, this question opens up another can of worms. The
psychology of investing. But, we'll save that controversy for
another time.
For arguments sake let's assume you get an 8% compounded rate
of return each year for 30 years. This comes to $360,920.41.
Okay... so now you're 65 years old and you have $360,920.41. But
guess what?
When you reach 66 your $500,000 term life insurance policy will
lapse without value because the annual premium becomes
$21,180.
Yep, you read that right! It jumps from $700 to over 21 thousand
dollars.
At age 70, it's $31,430. At age 75, it's $52,970.
There's no way on earth you'll pay this premium. Problem is... you
aren't dead yet!
You have paid $21,000 over a 30 year timeframe to have a
$500,000 life insurance policy during a period of time when the
odds are you would never die anyway.
Under normal circumstances you will die somewhere around age
80 -- give or take. Your loved one's investment account still won't
be worth $500,000.
What's more, she will have to pay income tax on the investment
gains. Remember, life insurance proceeds are income tax free.
Permit me to repeat myself. I am not against term life insurance ...
as long it's purchased with an eye towards the reality of future
expectations.
If your term life insurance policy is issued by a highly rated
company with a broad selection of products, you will have ample
opportunity to convert the term into something more permanent
over the course of the 30 years in our example.
Keep in mind your age determines the length of time the term
policy will have a guaranteed level premium.
You may not be able to get more than a 10 year guarantee if you
are over 50 years of age.
So, exactly what is the best kept secret in a life insurance policy?
It is a universal life insurance policy that guarantees the
death benefit regardless of investment performance.
Universal life is the most flexible type of policy on the market. The
premium is higher than term, but lower than whole life. There are
several on the market, so you must be careful.
If you decide to buy term because of budget constraints, then be
certain to buy from a company that also offers universal life.
This gives you the chance to slowly convert the term into universal
with the same company over the length of the term guarantee.
As your budget permits convert term into universal.
One word of caution. Long term interest rates are critical to the
performance of universal life insurance.
Because they've been depressed for several years and will likely
continue so, you must get the universal life with an unconditional
death benefit guarantee.
Here's an example using our 30 year old male. The $500,000
universal life insurance policy premium is $2,871 per year. This
compares with the already discussed $700 term and $3,650 whole
life premiums.
Let's say you really do decide life insurance isn't important when
you reach 65. By that time, you would have paid $86,130 in total
premiums.
Down a rat hole like the term plan? Nope!
The cash surrender value would be at least $85,501. It might well
be over $100,000 based on the actual competitive interest rates
credited to the policy over the 30 years.
When you buy the right type of universal life you guarantee the
death benefit for as long as necessary... plus you have the ability
to recover your expense if you wish to cash it in.
You can benefit from the best of both worlds when you use the
best kept secret in a life insurance policy.
About the Author
Veteran financial consultant Don Adams provides easy to understand advice on a wide variety of money matters. You're just a click away from getting tons of free tips at http://personal-finance-on-the-net.com.
Article Source: http://www.simplysearch4it.com/article/9083.html
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