How to Buy Life Insurance

Life Insurance – How Much and What Kind

Life insurance is not about leaving the kids and grandkids 75% of the free world.What you want to find out is how much, and what kind of Life Insurance you should purchase.

This may not be the most relished article by the insurance industry but it is what I see and what I believe. It is also a way to avoid being talked into something that perhaps you just plain do not need.

First off forget about leaving the kids and grand kids a life of ease. That is not what insurance is about. The real purpose of insurance is about you finding what is best for your situation. But to do so you must look at insurance from a very cold and matter of fact position.

You must view insurance as replacing the individual as a money machine. That is pretty cold but it is honest. You must also view what other situations exist now or probably will exist when the insurance is needed. The difficult part is constantly reviewing these other situations because as they change your insurance needs may change. For example:

1. Are there other assets that can be tapped such as multiple incomes, savings, IRA, property income, etc.
2. How many dependents are in need and for how long? Is it possible a spouse will remarry? How old are the children?
3. What is the current style of life and is it necessary or desired?
4. Are you debt free or plan to be or are you over your head in debt and cannot control spending?

These are exceptionally difficult questions which must first be dealt with before you can progress.
But once you have solid answers with all responsible parties, the rest is much less difficult because you now know where you are going and the rest is simply understanding the industry.

Types of Life Insurance

Though there are insurances labeled endowments and annuities (which are very good investments), the two basic types of insurance are whole life and term.

1. Whole Life – The appeal is that it builds cash value while offering insurance protection. But no other savings program I know of takes your money, puts it into an account for you but does not allow you to see any of it for 2-3 years. No other program has a negative cash value for years to come. And in future years, since this cash value is supposedly your money and you borrow it, how come you have to pay it back with interest? The argument is, you have life protection while building cash value. OK. Why not spend a lot less and have term insurance and use the extra money in a better investment? Even a very safe mutual fund will yield a far greater return. Or perhaps even pay off debt with what you will save. Now that can yield up to 40% tax free. (See Debt Destroyed By Magic Bullet.)

Is there a good side to whole life? Sure there is. First of all, if you take out a whole life as a youth, rates are very low. Whole life can also protect your future insurability. Rates will not change as you get older. A solid small amount of whole life to cover last expenses could be peaceful to the mind. Whole life is better able to stay up with inflation. But overall, I cannot in good conscience recommend it in most circumstances.

2. Term Insurance – Term insurance has limitations as suggested above. It builds no cash value but it is the least expensive form of insurance available. There are two types of term insurance: straight term and decreasing term.

a. Straight Term – as its name implies, straight term exists as is and for the full amount as long as you make payments. It does not increase or decrease the amount of coverage.

b. Decreasing Term – again as its name implies, decreasing term decreases as the length of time goes on. This type of insurance is most often used in association of a mortgage or car loan. But here is a major caution. You must insure the decrease does not exceed the payoff. For example. Decreasing term insurance for a 30 year mortgage will not keep pace with the mortgage itself. If the decreasing term insurance decreases over 30 years it is a straight line decrease. A mortgage, however, is not straight line because the majority of the interest is in the beginning. Possibly 75% of the mortgage will still be owed when 2/3 of the decreasing term insurance has passed.

There is one other caution I would suggest. Do not buy insurance from a commissioned retailer, car dealer, mortgagor, etc. Buy the insurance from someone who knows his trade – a licensed insurance agent. Additionally do not make insurance part of the retail sale unless you want to pay interest on top of the insurance.