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The Life Insurance Policy and Its Best Kept Secret
Do you love someone deeply enough to spend your hard earned dollars on a life insurance premium -- month after month? After all, the benefit from a life insurance policy isn't for you. It's for the ones you love, but after you've gone. Life insurance is money paid to those who rely on you today to give them a secure standard of living, which they can lose in a heartbeat. This is money when they need it the most ... with no income tax or publicity. Buying a life insurance policy can be challenging because it isn't an easy subject matter to begin with. Most people get somewhat confused about how it works and whom they can trust enough to make the purchase. And there's an overwhelming number of companies and agents all clamoring for your attention. The purpose of this article is to help clarify a huge misconception about term life insurance. While doing this, I'll introduce you to what many knowledgable professionals consider to be the best kept secret in a life insurance policy. Buy term and invest the difference is a phrase touted by those ... including some life insurance agents ... who have absolutely no idea how much harm it's implementation can cause. The principle theory behind this idea is you no longer need a life insurance policy when you reach a certain age such as 55, 60 or 65. Supposedly your kids have finished school and are doing just fine earning their own income. And you and your spouse are living comfortably on retirement savings and social security. On the surface and to the naive, this might appear reasonable. It's relatively easy to blow holes in this hypothesis, but let's focus instead on the real problem with this scenario. We are living longer ... much longer ... than ever before. We may not be enjoying it very much due to poor health but, nevertheless, we're hanging on. Life insurance companies know this better than anyone. In fact, most of them now use age 115 has a factor when calculating life insurance policy premiums. You hear about retirees who are forced to find work at McDonald's or Walmart. Have you ever joined a seniors chat room on the Internet and witnessed the concerns most of them have about running out of money before they die? Many of these seniors are frightened to death. And this is before we even consider the babyboomers right behind them. An intelligently purchased life insurance policy can be the saving grace for those you love the most. Now, let me set the record straight. I have nothing against term life insurance. Over the past 24 years I've personally sold millions of dollars worth. What bothers me ... and what I believe to be criminal ... is when term life insurance is sold under false pretenses. Let's use a simple example. A 35 year old nonsmoking male in excellent health can buy a $500,000 term life insurance policy for about $700 per year. The premium is guaranteed to be $700 for 30 years. Some companies will be a little cheaper and some a little more expensive. The buy term and invest the difference advocate would compare this to a $500,000 whole life insurance policy at $3,650 per year. Once again, some companies will be higher and some lower. Theoretically, you have $2,950 to invest each year for 30 years. I say theoretically because in the real world you would never consistently invest $2,950 each year. Not the same way you would commit to a life insurance policy premium. Why do I know this? Call it human nature based on 24 years of experience. But, let's give you the benefit of the doubt and say you actually do invest according to this hypothetical plan. What rate of return are you going to make over 30 years? 5% ... 8% ... 10 percent? By the way, this question opens up another can of worms. The psychology of investing. But, we'll save that controversy for another time. For arguments sake let's assume you get an 8% compounded rate of return each year for 30 years. This comes to $360,920.41. Okay ... so now you're 65 years old and you have $360,920.41. But guess what? When you reach 66 your $500,000 term life insurance policy will lapse without value because the annual premium becomes $21,180. Yep, you read that right! It jumps from $700 to over 21 thousand dollars. At age 70, it's $31,430. At age 75, it's $52,970. There's no way on earth you'll pay this premium. Problem is ... you ain't dead yet! You have paid $21,000 over a 30 year timeframe to have a $500,000 life insurance policy during a period of time when the odds are you would never die anyway. Under normal circumstances you will die somewhere around age 80 -- give or take. Your loved one's investment account still won't be worth $500,000. What's more, she will have to pay income tax on the investment gains. Remember, life insurance proceeds are income tax free. Now let me quickly repeat myself. I am not against term life insurance ... as long it's purchased with an eye towards the reality of future expectations. If your term life insurance policy is issued by a highly rated company with a broad selection of products, you will have ample opportunity to convert the term into something more permanent over the course of the 30 years in our example. Keep in mind your age determines the length of time the term policy will have a guaranteed level premium. You may not be able to get more than a 10 year guarantee if you are over 50 years of age. So, exactly what is the best kept secret in a life insurance policy? It is a universal life insurance policy that guarantees the death benefit regardless of investment performance. Universal life is the most flexible type of policy on the market. The premium is higher than term, but lower than whole life. There are several on the market, so you must be careful. If you decide to buy term because of budget constraints, then be certain to buy from a company that also offers universal life. This gives you the chance to slowly convert the term into universal with the same company over the length of the term guarantee. As your budget permits convert term into universal. One word of caution though. Long term interest rates are critical to the performance of universal life insurance. Because they've been depressed for several years and will likely continue so, you must get the universal life with an unconditional death benefit guarantee. Here's an example using our 30 year old male. The $500,000 universal life insurance policy premium is $2,871 per year. This compares with the already discussed $700 term and $3,650 whole life premiums. Let's say you really do decide life insurance isn't important when you reach 65. By that time, you would have paid $86,130 in total premiums. Down a rat hole like the term plan? Nope! The cash surrender value would be at least $85,501. It might well be over $100,000 based on the actual competitive interest rates credited to the policy over the 30 years. By paying more in premium using universal life you guarantee the death benefit for as long as necessary ... plus you have the ability to recover your expense if you wish to cash it in. You have the best of both worlds when you use the best kept secret in a life insurance policy. Don Adams is a 24 year veteran financial consultant who provides easy to understand personal finance advice on a wide variety of money matters.
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