Understanding Life Insurance

Each time I meet with a client we discuss life insurance needs. I am amazed at how little people know about the insurance they carry. We make it a priority that each of our clients understands any type of investment or insurance product before they buy it.

For example, I commonly see a lot of people carrying cash value insurance (or some derivative). The only type of life insurance we recommend is level-term life insurance.

It's typical that I meet with a middle-aged couple who are paying nearly $300 per month for only $200,000 worth of coverage. If that policy were converted to level-term insurance, that rate would instead be $300 per year and would instead buy about $500,000 worth of coverage.

Cash value is typically a high-commission generating product for the salesmen who sell it, and they are usually very good at selling it. Normally they will push the fact that the policy builds up a cash value that you are able to cash in. The stated rate of growth is usually stated around 6%, however after fees are paid to the insurance company, studies have shown that rate to be only 2-3% and sometimes much lower. If you were to buy a $100,000 cash value policy and over the years it builds up a cash value of $10,000, you can cash that in at any time. However, if you were to die, your beneficiary would only receive the face value of $100,000. What happens to that $10,000 cash value that built up? The insurance company keeps it.

So the moral is to NEVER buy cash value insurance. Always buy good level-term life insurance where the policy is 6-8 times your annual salary. For stay at home parents, I also recommend getting coverage at around $100,000 - $150,000 (times the number of children you have) on themselves. So a stay-at-home mom with two kids might carry a policy of $200,000 on herself.

Also remember to chose a term that will carry you through to a point where you can afford to insure yourself. The point of any type of insurance is to pay someone else to take on a risk that you cannot afford yourself.

If you'd like quotes from trusted services that we have used, feel free to check these out...

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