There are two basic types of insurance: Term and Whole Life (or Cash Value).
Term life insurance is fairly new to the market, only becoming popular in the late 70s. It is purchased for a specific term, or length of time, usually designated in five or ten year increments depending on the insurance carrier. This type of insurance is typically a fraction of the cost of a cash value policy for a few different reasons, the most important one being that the carrier prices premiums based on the risk factor. In other words, the younger and healthier you are when you buy a term policy, the lower the chance that the insurance company will actually need to redeem your policy.
For instance, a 30 year old non smoker in excellent health who buys a 20 year term policy will be able to buy about $200,000 worth of insurance for under $100 a month because there's not a great chance he's going to die before he is 50, when the policy expires (and he would have the right to renew for significantly lower premiums than a new customer buying the same coverage).
Conversely, a 65 year old with high blood pressure who wants a 10 year term policy will pay a much higher premium since it's highly likely he will die by the time he's 75 when the policy would expire.
Whole Life / Cash Value policies are very different. They are much more expensive, for a number of reasons:
- Each policy only covers one person, not an entire family as with Term insurance.
- You are investing part of your premium in various mutual funds, etc., hoping for a return on your investment
- The insurance company knows it will need to pay your death benefit because you are indeed paying for your entire, or whole, life. Their level of risk is 100% unless you cancel your policy.
Many consumers buy this type of insurance assuming that it's a one stop shopping deal. They have life insurance, they have investments, and they won't need to worry about anything.
However, these same consumers find out - usually way too late in the game - that this product didn't live up to its expectations. Insurance agents who sell these policies make some huge commissions and don't always explain to their clients exactly what they are buying.
Before considering a cash value policy, consider the following:
- The money you invest might only give you a 3% return on your investment. The insurance company actually keeps the majority of what your money earns!! You get only a tiny fraction for yourself. Even though is explained in the fine print of your policy, no sales person is going to tell you this up front.
- When you die, your survivors do not get the face value AND the cash value! Something else explained in the fine print and another item your sales person will forget to mention. Your survivors will get ONLY the face value of your policy. Who gets all the cash? The insurance company keeps it all!
- There is no such thing as a cash value policy that is "paid up" at some point. Your sales person will tell you this happens, but what he isn't telling you is that at a certain point your premiums will be taken from your cash value. You may not be writing a check every month, but you are definitely still paying for your policy. Since most people are totally unaware of when and how this happens, they are sometimes shocked to find out that when they want to borrow money from their cash, there isn't enough to borrow!
- Many consumers think that having this cash at their disposal is a good deal. It's there to use in an emergency, right? No it's not! You can borrow it, but you'll be paying interest and late fees! See? The insurance company is already treating this money like it's their own - because it is and you don't know it.
- If you have a cash value policy right now and decide that maybe you should cancel it and buy term, be prepared for your sales agent to make your life miserable. He doesn't want to lose this fat commission - which he gets every month right out of your premium. Be prepared for heavy sales tactics, lies, and even verbal abuse. (I've seen it all as I work with my clients who try to cancel these policies!) These commissions are cash cows for these agents and they don't let go easily.
In reality, you should never mix investing with life insurance. There is absolutely no reason to, especially when an insurance company keeps most of your investment returns.
Invest your own money, keep the profits, and retain total control over your investment portfolio.
We help many individuals and families cancel their cash value policies, buy term, and invest all that extra money they were paying in high premiums.
Example:
- Your cash value policies for you and your spouse were costing $380 a month
- One term policy for the exact same coverage, covering you both, is $100 a month
- Take that $280 you're saving each month and invest it! (You weren't investing that much before when you had your cash value policies! Check out the fine print, and look at some old statements. It's all there. They just hope you don't understand what you're seeing!)
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