I’m running across more young people who have been sold (tricked into?) whole life insurance policies. These are insurance products that you pay into for the rest of your life. Your heirs get a death benefit, and cash value accumulates in the policy over time. Sounds great right?
EXCEPT:
- It takes many years of paying the insurance premium and broker’s commissions before your premium payments start to be allocated to cash value.
- The returns you get are rarely the returns you were shown in the sales process.
- The premiums are so much more expensive than a comparable term life insurance policy (5-10 times higher for the same death benefit) that most people stop paying on the policies long before the cash value has become even close to what they have put into the policy.
Let’s take a moment to remember why life insurance is sold, anyway. The primary purpose of life insurance is to replace the lost income of a person who dies in his/her working years. This income only needs to be replaced if the would-be dead worker has dependents who rely on his/her income for their support.
Who needs life insurance?
Parents or spouses whose dependents need the death benefit to pay bills after your death. How much? General rule of thumb is 10 times your salary using a 20-year term life insurance policy.
Often, I see young people who aren’t even married paying tons of money for whole life insurance because their college buddy (who is not evil, just trying to eke out a living on commissions alone) sold them a policy as a great investment.
Who needs whole life insurance (insurance until you die, no matter what the age?):
- Rich people who may have an estate tax and want to cover that with insurance for their heirs.
- Business owners who need to leave cash to buy out partners/shareholders or pay taxes on the transfer of the business at death.
Who doesn’t need life insurance at all?
- Retirees who have saved enough to see he/she plus spouse/partner through retirement.
- People who are single with no kids or others who depend on their income.
Sure, this is a blog and may be an oversimplification of nifty strategies involving life insurance. I’m sure I’ll get a ration of doo-doo from insurance salesmen everywhere. But, it’s my blog and I’ll say what I think. Beware the “financial adviser” whose answer to every question is an insurance policy!
