Financial tune up Part 8 is on insurance check-up to find out if one is adequately insured. It is a basic part of financial planning that if left out could leave the family in financial wreck. I know it is difficult to talk about death, but talk about it we must if we want to be financially responsible. It makes sense to start with life insurance
It is not as difficult as it seems once you get the hang of it. Life insurance may be divided into two basic types: term and permanent insurance. Term insurance covers a policy holder for a definite term. There are three factors in this type of insurance: the face amount or death benefit, length of coverage and the amount of premium the insured person pays.
The above image is courtesy of http://www.freefoto.com. But what is important is that permanent life insurance stays active until it matures or as along as the policy owner continues paying the premium. This type of insurance accumulates cash value. The owner of the policy can withdraw the cash value or borrow the amount or surrender the policy thus receiving the surrender value.
Some people do not think it wise to get insurance that accumulates a cash value. I know it sounds terrific to have an insurance product that combines savings and insurance, but people’s experience including mine contradict the superb projections the agents show. Someone who researched this said that no policies ever performed as shown on the agents‘ projection.
So the moral lesson of this story is to buy term insurance instead of the cash value policy. Do not invest money into it as the returns are terrible as I gathered from my own experience. I will give you an example that I read somewhere else but proven by real life coverage at the time the example was given.
A 30-year old man with $100 a month to spend on life insurance goes to get quotes from top five companies. He finds he can buy an average of $125,000 of insurance and he is drawn by this policy that will build up savings for retirement. Anyway, this what a cash value policy is supposed to do. But let us follow this man if he buys a term insurance.
The term insurance he can buy is for $125,000 for a 20-year level term which will cost him $7 per month. Let us compare that to the $100 a month for the cash value policy. You would think the $93 goes to the savings? Does that make sense? But no, the $93 goes to expenses and commissions during the first three years.
After three years, the return on the average will be 2.6% for whole life, and 4.2% for universal life. They have a new improved one with mutual funds that earns about 7.4% but before you jump up to celebrate, the same mutual fund grows an average of 12% outside the policy. Are you convinced getting a term insurance is better?
So the man is better off getting a term insurance and investing the $93 a month in mutual funds. By the time the man is 57 years old, his home will have been paid and the kids are hopefully on their own. Your insurance is gone too but he is $700,000 richer from the mutual funds. (Get a good financial adviser). He won’t need any insurance then.
I am glad we had this time together for was sceptical at first knowing how tedious it is to think of death and insurance. But we did it! Next time we will deal with other insurance needs, more like the auto and home insurance. There are savings to be had there and things to do so one does not end up in financial ruin. This is all essential parts of our financial tune-up.
By Roger Guzman, M.D. and Evelyn Guzman
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