My husband and I recently purchased a new home with a bigger mortgage (more about that debacle later). With the new mortgage, if I got run over by a bus my husband would be stressed about paying the bills. Yes, I am the breadwinner, and it feels good. But the point is that for the first time, my income would be needed after my untimely death. So I went about researching Life Insurance and this is what I found.
First of all, who knew there was more than one type? In fact, there are all sorts of flavors of life insurance from your plain ole vanilla to your fancy pistachio.
- Temporary
- Term Life Insurance. This kind is temporary and is the cheapest. You pay a premium, which may or may not fluctuate depending on the policy, and if you keel over before the ‘term’ of the policy, they pay your beneficiary the face value. So you can buy a 1 million policy for 30 years and you pay $X per month. If you die anytime within the 30 years, your beneficiary gets 1 million dollars. If you don’t die within the 30 years, you don’t get anything- but hey, you are alive!
- Permanent
- Whole Life Insurance. With this kind, you pay a level premium but your money goes into an account that creates an actual cash value for you. This account grows at a rate set by the insurance company, which is sometimes not a competitive savings rate. After years of paying, this cash value can be accessed by means of a loan. At the time of death, whenever that is, the death benefit is paid but this cash value is not paid. Whole life is more expensive at first, but can level out over the years.
- Universal Life Insurance. This one is similar to Whole Life, but the savings rates can be higher (they follow the market) and the premiums are flexible. Once the cash value reaches a set point, you can stop paying the premiums. However, because this one is more flexible and interest rates follow the market, if interest rates are low, you could end up having to fork over extra money in premiums just to keep the policy.
- Variable Universal Life Insurance. Similar to Universal but the cash account is held in a separate account that can be invested in mutual funds and is managed by a fund manager.
- Endowments. This kind is much more expensive. These are paid out rather you live or die after a set number of years or a set age.
- Accidental Death Insurance. These are the cheapest because they very rarely pay out any benefit. As you can guess, you only get paid if you die from an accident or injury (not an illness). You can also get accidental death insurance as a rider to your regular life insurance and it generally doubles the payout if you die from a freak accident (ie. entire cast of final destination).
So which one is best? Well, I recently had a ‘financial advisor,’ that my mom swore was legit, attempt to convince me that a variable universal policy was just perfect for me. Once I researched it, I found that it was actually me buying the policy that was just perfect for HIM. Why? Because they make huge commissions off of these sort of policies. So they will try to sell it regardless of your situation.
Here is why. Your totally unbiased ‘advisor’ is making 75-100% commission off your permanent insurance premium the first year, then about 5% for each additional year you pay. Sounds like a sweet job, right? Well, when they sell you term insurance, they only make about 30% off your first year then about 4% a year for your term. So if we do the math, on a 1 million policy, thats the difference between about $5,000 for permanent and $1,000 for term. They sell these hard because for the same time/work they make about an additional $4,000 per million dollar policy (that’s a 500% gain).
I decided to go with the term policy. From all the research I have found (from people NOT invested in the sale of such policies) it is generally best to keep your insurance and your investments separate.
You see, if you take care of your finances (pay down debt, increase savings) then you really won’t need a life insurance policy in the latter part of your life. By only getting a term policy for the duration of my mortgage at a MUCH cheaper price (mine was 4% the cost of permanent), I am able to save the difference into my retirement and general savings accounts. Here, I make a higher return and I pay less in fees. Once my mortgage is paid for, my term policy will be over and if I die at that point my husband will have nothing to worry about. Our mortgage will be paid off, our debt will be paid off, and he will have a nice savings to cover any expenses, you know- like mummifying and gold-leafing my corpse.
