Wednesday, March 18, 2009

My Life Insurance is Killing Me!

Have you ever purchased a life insurance policy? Did you squirm as much as I did when you were filling out the paperwork? Life insurance – like estate planning – forces us to confront our own mortality.

From a sales pitch perspective, life insurance can be a veritable minefield. Imagine a smooth dude in a snappy suit ushering forth a slick line like, “what will your family do if something unexpected happens to you?” Or, “you don’t really want your wife and children to wonder how they’ll make ends meet, do you?” Talk like that can make your skin crawl! Of course we don’t want our families to wonder where their next meal is coming from after we’re gone!

The problem is that many of us make an emotional decision when we buy life insurance and we miss the financial implications. Make no mistake, caring for your family by purchasing good level term life insurance is absolutely essential. However, one of the greatest myths handed down through the insurance world is that the need for life insurance is permanent. From a financial perspective, this couldn’t be further from the truth.

Insurance is a financial tool that allows us to transfer risk. We transfer the risk only while we cannot afford to assume the risk ourselves.

Many insurance salespeople encourage life insurance products that have a cash value savings account built into them. They go by names like whole life, universal life, variable life, and so on. They’re an easy sell because we like the idea of having some of our premiums saved for us to use down the road – you’ll see these policies called “investments.”

Unfortunately, these cash value life insurance policies are very expensive for the consumer. The commissions are huge on these products and the returns on the savings accounts are depressingly low. To make matters worse, because of the expense related to these policies most policy owners don’t realize they’re underinsured. And should they kick the bucket, the beneficiaries only receive the policy’s death benefit – all the saved up cash value is kept by the insurance company.

Good thing we have an alternative! Term life insurance is purchased for a specific period of time. There isn’t a savings account built into the policy and the premiums are kept level throughout the duration of the term. As a result, we get the coverage we need without any of the fees, lackluster savings, and fluff we don’t, so the premiums are super affordable. If we die during the term of that policy the beneficiaries receive exactly what we paid for.

I recommend buying ten times your annual income in good level term life insurance – typically a 20-year term will do. This way, when your beneficiaries invest the death benefit at an average return of 10%, the annual interest will be equivalent to your former annual income. You’ve been replaced…financially speaking.

I’m currently working with a couple who have about $350,000 in universal life insurance coverage. They’re paying around $250 each month in premiums. The problem is that they really need about $650,000 in coverage to be adequately insured. I ran a quote for them to discover they could get two 20-year term policies with the increased coverage for – between both of them – $50 a month. That’s a $200 difference each month! In 20 years, the cash value of their current policy would grow to around $55,000. But if they invested their $200 per month difference over 20 years, they’d have over $173,000! By now the picture is very clear.

See, in 20 years, this couple’s children will be grown and gone. Because they got serious today about developing a plan for success, they will be debt free and will have invested at least 15% of their income for retirement. In 20 years, they’ll have about $650,000 in investable assets. Now, if something happens to the primary income earner those funds can be invested and the surviving spouse can live off the interest. They’ve become self-insured and don’t need life insurance anymore.

For those that currently have cash value policies, don’t run and dump them right away. Be sure to purchase a good term policy first. If for some reason you’re uninsurable, you’ll still have some life insurance available – cash value policies are not ideal, but they’re better than nothing at all.

If all this insurance talk is making your head spin, recognize that by not understanding your policies you could be paying hundreds of dollars every year in unnecessary premiums. On March 24th, we’re holding a Past Due: Insurance eCoaching event covering seven different insurance areas – homeowner’s/renter’s, auto, health, disability, long-term care, identity theft protection, and life. We guarantee you’ll save at least $300 – $800 a year in premiums when you apply what you learn during this program to your current insurance plan. Visit to register today!

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