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Whole life Insurance

So we’ve covered Term, now let’s go over Whole Life policies.

In Whole life insurance, you pay a “fixed premium” for a “fixed coverage” amount. Both of these numbers are supposed to never change as long as the policy stays in effect. The costs of these policies on average can be up to 10 times that of Term policies of the same face value.

One reason for this is expense is that these policies are not just life insurance, but also act as an investment vehicle. A portion of your premiums each month go to investment accounts that the company sets up to earn income. A portion of the income is credited to them and a portion to the “cash value” of your account. Regardless of your age when you purchase, the cash value should be equal to the face value of your policy if you reach 100 years of age. That is one of the factors that determine your premiums to begin with.

Another reason for the higher cost is the length of your life. This insurance will be in force until you die, or reach 100 years of age. As you get older, you are more likely to die and hence the cost to cover you goes up for the company. Whole life generally overcharges you about 30% when you sign up so that as you age, the cost of your ever increasing risk is still covered.  So, your costs don’t go up and they keep a healthy profit margin, win – win.

It is highly suggested by every non- insurance industry professional and even some of those to, that it is a bad idea to use whole life insurance as an investment vehicle alone. If you do not need the face value of the policy, you should not purchase this product.

For more on this topic I suggest reading this article from Smart Money magazine, or for a more concise version you can ask Financial “guru” Dave Ramsey.

-Jared

Term life insurance

Term life is by far the simplest and cheapest option out there.

Companies offer a variety of “Terms” meaning length of time. These can be be anything they want but typically fall in 10 – 20 – or 30 year lengths.

You then have your premium, which is based on your age and health at time of purchase.

So what you end up with is something like I purchased a few years ago. For $125 per year paid annually, I have $300,000 of coverage. It’s an all or none gamble. If I die in the 10 years the policy in is force, my wife gets the payout. If I live the full ten years then I get nothing and my payments to them stop. At that point I can buy a new policy under whatever terms are available.

Term policies are almost always convertable, this means that at any point during the term you can call your agent and ask them to turn your policy into a Whole life, Universal or Variable policy instead. Normally they will bend over backwards to do this for you, as they make a whole lot more money that way.

Term is a great option for anyone. It’s cheap, easy to understand and has no strings attached as the permanent life options do. If you are buying a home or having a child it’s a fast and easy way to protect them at little cost.

I suggest Term life to anyone who asks about insurance. The main reasons are the cost to value analysis and the investment options. If you can afford a product costing ten times more (whole life) why would you not just invest the extra in something that was built for that purpose?

-Jared

Whole life insurance = Pissing your money away

although many of you have learned to take my titles as advice enough i’ll go on to explain anyway, and piss off your insurance agent to boot.

Whole life insurance is expensive, we all know that, but your broker/agent told you the benefits and it sounded pretty convincing so here we are.

Benefit 1- Your premiums will never change.

Problem 1- Your coverage might. Take a look at the fine print and make sure that as you age, there aren’t changes to your coverage. As you get older you are offered higher pricing for the same coverage levels, so if price does not go up, coverage may go down.

Benefit 2-  Im covered for life and never have to worry again.

Problem 2 – Most policies are cancelled in the first ten years. There are dozens of reasons for this which I will cover in future posts but for now let’s focus on the two most comon issues.

Your policy may lapse. If you fail to make a single payment you can have your coverage cancelled and may not be allowed a grace period for buying back in. It’s in the companies interest to have you buy a new, more expensive plan.

Things change. You may have a child, buy a home, lose a home, or god forbid, lose a child. Dozens of other reasons again,but I’ll explain later. The point is that life insurance is supposed to be based on your current and foreseeable needs.  a policy that is life long can not possible take all these things into account unless they sell you a MASSIVE umbrella style, all encompassing policy, which you most likey don’t need and can’t afford.

If these are not reasons enough to avoid whole life take into consideration that on average a whole life policy can cost more than 10 times that of an equal value term policy and the”investment” portion nets average returns of 2-3% industry wide. that’s no more than a decent savings account which by the way you can access with out penalty or wait times.

Buy term and leave the investments seperate, you’ll thank me.