Life Insurance As an Investment? Yes, No, Yes, No!
First thing first, what is the main purpose of life insurance? Well, simply put, it is to cover your loved ones or business obligations in case of your premature death (I know, it is always premature!). If you keep that thought alone in your mind, you are already well on your way to make the right decisions.
We have advised over and over again that if you look at life insurance from the standpoint of cash value accumulation, cash back options (ROP rider), or some other cash build up variation then you may be happy with the cash build up, but if your life does not pan out as expected (such as getting run over by a bus at age 40), then you may be leaving survivors, who counted on you for financial support, with much less than they would need to survive. In other words, instead of looking at your present obligation, you looked at the pot of gold at the end of the rainbow. Problem is, the rainbow route is long and unpredictable, and the pot of gold far away. OK, simply put, when deciding on the type of life insurance you need, get as much as is needed or at least as much as your budget can handle. Only one type of life insurance can do that, and that is term life insurance. It is not whole life, not universal life and certainly not indexed or variable life!
Lets look at some numbers. You have $300,000 in total debts, your children need an education which comes out to about $200,000, your spouse needs an income, that’s another $500,000 (this is a very basic view of your potential needs). Total needed is $1,000,000! Your budget for this plan is $40/month. And please, be sure not to go over budget on this. You would not want to get a super policy, only to have to cancel it a few months later and loose everything. Stay within a budget.
Options 1: If you select term life insurance, you can possibly qualify for the whole amount – that is the whole $1,000,000 in coverage for around $35/month (age 40 male, no tobacco…ask for a personal quote please). Your dependents are fully covered in case of your premature death. Job is accomplished and you can feel good about yourself!
Option 2: The agent visits, tells you that term is cheap, or term is like renting instead of buying or term is a waste of money because it offers no cash value or…whatever. So you listen to the options and of course it is whole life or universal life or some other cash value life insurance plan. Not that these products are useless and always a bad choice, but in your case (as in many cases) it is a bad choice! If you go for the universal life plan which includes some cash value and lifetime rate guarantees, you will qualify for, at most, $100,000! Awesome, that should really do the job if you get hit by a bus or as it happened recently to a 36 old female, you die of a heart attack. Imagine how your loved ones will feel when they need to sell that comfortable home you bought and they have to move in with grandma. Now the agent was not being dishonest, he was just being ignorant. After all, it is YOUR responsibility to gather facts and make the final decision – not your consultant’s. That is why we always advise that, before people make a final decision, they ask at least three people they trust for information and opinion.
Does this mean that cash value life insurance is of no use? Not at all! It does mean that cash value life insurance is to be considered only after you have put in place the full amount of coverage needed to take care of your responsibilities.
Here are some good uses of cash value life insurance (whole life, universal life, indexed life or variable life insurance). One top reason we hear about not wanting term life insurance is the guarantee period. In other words, if one selects a 10, 15, 20 or even a 30 year term plan, after the guarantee period (10,15, 20 or 30 years), rates can go up very high. What that means is that you may not be able to keep your term policy after the guarantee period and that would possibly mean having no insurance at an older age. On the other hand, if you are able to lock in lifetime rate guarantees, you do not need to worry about increasing premiums. What that means to you and your dependents is lifetime peace of mind.
Another good reason to own cash value life insurance, well…cash value! There is no denying that, particularly at today’s available interest rates, cash value life insurance, which can be equated to bank CD’s, for risk level, offers a very decent interest rate. Unlike a bank CD though, you may need to wait years before any of that cash value is available to you. No matter, since you did get the policy for the long term it should work out fine. Do we recommend that cash value life be your only retirement vehicle? Of course not! But it can be part of your overall retirement picture. After all, cash value life insurance does offer two cash out options. The first one is, you live a long life and take advantage of the cash build up in the policy. The other is not so great for you (in other words you die prematurely) but it gives you a simple way to leave your loved ones with an instant retirement plan.
I would like to mention one last important aspect of most cash value life insurance policies. And that is, flexibility. In other words, many polices can be updated to meet your lifetime changing needs. Premiums can be adjusted. Face amount can be adjusted. Money can be withdrawn and put back into the policy and so on. On the other end, term life insurance is as stiff as it gets!
To keep this article from getting too large and complicated, I will not get into of the ins and outs of using cash value life insurance for the purpose of cash build up – tax benefits, loan options, pension maximization, retirement savings enhancements and so on. Please feel free to do an online search on any these terms or go to one of our other articles. Feel free to ask us free questions.
I hope that this primer on cash value life insurance and when or when not to get it, has given you a good head start. As we always say in all of our articles, please always ask, ask and ask more questions. be well!
About the Author
Philippe Deray – About the Author:
Philippe Deray is President and CEO of MCD Financial Services and MCD Life. Our web site address is http://www.mcdlife.com
Company Profile
MCD Life is a successful, dynamic company built on the principal of serving our customers FIRST! Our primary mission is to bring peace of mind to our clients by offering innovative, value-added products and information that place emphasis on short and long term benefits, benefits backed by selected companies with high quality assets and written guarantees.
Our Focus Life Insurance is keeping you informed
Yes, keeping you informed. No need to purchase anything form us. Just send us or send me your questions and I will happily answer it. Questions on lie insurance, great. Questions on disability insurance, great. Questions on seniors and lief insurance, fine. If we don’t have the answer, we will do our utmost to get it for you. Since, I have been in business for over 20 years and I seen all sort of cases with bad health history, I have even developed a basic knowledge of health and nutrition (that means food and social nutrition). Feel free to ask. It may help you get better rates on life insurance too.
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