You need life insurance if you have a family and you need to provide for them in the event that you die before they do. If you are single, don’t have anyone depending on you, then you do not need life insurance. You could get a small life insurance policy to cover any funeral expenses, so your loved ones won’t have to come up with the money to take care of that expense.
If you do have a family, then you definitely need to obtain a term life insurance policy. Do NOT get a whole life, universal, permanent life insurance, or accidental death insurance. They are a rip-off. You are sold those policies with the allure of the cash value. When you die, guess who gets the cash value? No, not your spouse or kids. The insurance company gets to keep it. Your family receives the policy amount. If you have a $500,000 policy, that is all they receive. Also, these other policies are more expensive than term life insurance. The older you are, the more you will pay.
A good term life insurance policy is less expensive than the other policies. You need to purchase at least ten times the amount of your income as the policy amount. If you earn $50,000, then you need a $500,000 policy. If you earn $40,000, then buy a $400,000 policy. Both spouses should have a policy even if one of you is a stay-at-home parent. If the stay-at-home parent, dies before the children are adults, then the surviving spouse needs to hire someone to take care of the children.
The term of the insurance is basically how long you’ll need to have the policy. If you have very young children, then obtain a 20 year term policy. This way, if one of you dies, before the children are out of the house, the surviving spouse has money to take care of the children and live. The money from the policy can be invested in good mutual funds to provide some dividend income.
You can securely obtain quotes online without talking to anyone. One thing to remember is that before the insurance companies will sell you a policy, you will need to have a medical exam done by their medical person.
If you currently have any insurance other than term before you cancel the other life insurance, make sure you get the term insurance first. If you cancel it and then go through the medical exam and Lord forbid they find something medically wrong with you, they won’t sell you the policy. Now, you won’t have any type of insurance.
Once you purchase that term life insurance, cancel the old policy and use the cash they returned to you and split it between debt repayment and emergency fund savings.
Don’t fall for the insurance salesman’s pitch that a cash value life insurance is an investment. The returns on these policies are low.
Cash value policies grow at different rates due to the different type of policies. They generally grow between two to seven percent. In contrast the average return of the stock market is 12%.
Variable life, may average better, but then the insurance company hits you with all sorts of fees. This lowers your net yield to around seven to eight percent.
When a male buys $125,000 cash value at thirty years old. He could pay somewhere around $140/mo, provided he’s a non-smoker in good health. A portion of that $140 goes to pay for the insurance, and the rest goes into that savings account someone sold him.
Let’s see what happens after forty years of paying way too much for his insurance. The cash value that has built up is around $65,000 by age seventy. This means he has $125,000 in insurance and $65,000 in cash value. If Joe dies now, how much will the insurance company pay out to his wife? She’ll get $125,000. Remember, I told you that the cash value goes to the insurance company. This means that kind, generous man gave the insurance company $65,000. What a great guy.
If instead he had gone with term insurance, he could get a $400,000, twenty-year policy for about $11 a month. This is roughly three times as more coverage than the cash value. He is spending about $130 less every month.
Let’s invest that $130 into a good mutual fund at 12 percent beginning at age thirty, it would grow to around $129,000 by age fifty when the insurance expires. If he keeps investing that $130 for another 20 years, by the time he’s 70, it will have grown to more than$1.5 million! Do you think his family would be well cared for with this money?
Never use insurance for investments. Insurance is to transfer the risks from you to the insurance company. Investments are to ensure you provide for a comfortable retirement and for your family in the long-term.