I wanted to take this time to answer some Q's that people have been asking me on the topic of life insurance.
1. What is the difference between term and permanent life insurance?
Basically, term insurance is like auto insurance. You pay into a policy and you only get money if something happens (ie, accidents or fatality). There is no cash accumulation and policies are normally 10, 20, or 30 years in length. When the policy term ends, you can either renew or stop insurance. The cool thing about term insurance is the affordability with a high death benefit. If you are in good health, a policy could cost you less than $50 a month with at least $500,000 in coverage. This option is good for people covering a need/asset such as a house or a business and it could also protect your family in case something happens to the breadwinner.
Permanent insurance is permanent. (Hence the name!) The policy will never outlive you and you are guaranteed a death benefit as long as premiums are paid into the policy. In essence, a permanent policy is life insurance combined with savings. With the premiums put into the policy, these funds are able to collect interest and build cash accumulation. Those monies are credited based on fixed, indexed (ie S+P 500), or variable interest rates (whichever you choose). Permanent insurance lets people pay into a policy and eventually the policy pays for itself. (This is assuming that premiums are above minimums.)
2. I am single and young (under 35), what is my need for life insurance? (Why the heck do I need it or want to get it?)
Good Q! Using the life insurance as a 'savings' vehicle, we can utilize the policy to be your own 'bank'. How is that you say? Well, as mentioned before permanent life insurance can accumulate cash value. That money is credited each year depending on what interest option you choose. For example, if one chooses an Indexed Universal Life policy (IUL) the interest would be credited based on the performance of the S+P 500. For the past 35 yrs, the avg performance of the S+P 500 has been about 8%. This means you would get 8% interest credited to your life insurance policy. The interest compounds annually, giving you a lot more interest than traditional savings, checking, or CD accounts (0-3%).
On the note of having your own 'bank', life insurance has tax-free distributions of money. That means if you need to access your money in the account, you can take up to the account value tax-free. If your account value was $40,000 you could take out a 'loan' of $20,000 to buy a new car and you don't have to pay back into the life insurance policy. Pretty neat, huh? You would be your own 'banker' and save yourself a lot of money by not having to pay interest and making the real bank rich.
Overall, life insurance for singles can be a wise investment and you have the security that if anything happens to you, your parents or family will not have to carry any of the financial burdens that you accumulated throughout the years.
3. Is this too good to be true? What is the reliability of the Life Insurance market?
The only drawback to Life Insurance is that the premiums you put into your policy are NOT tax-deductible. That means you would put after-tax dollars into your Life Insurance account. This is different from a 401(k) because in that kind of vehicle you would be putting in pre-tax dollars and deferring interest until you take out money from the account.
Life insurance is an under utilized vehicle that people should be more informed about. Taking money out tax-free is great as taxes will most likely grow in the next 10-15yrs. Taking advantage of today's low tax environment and putting money into life insurance can be a great way to diversify your financial portfolio.
The life insurance industry has stood the test of the financial slump of 2008. As many banks crumbled, not ONE life insurance company went under. They are financially stable and your money is guaranteed as stated in contract.
I leave you with an article I found on 401(k)s. Rethinking the 401(k) can free up money to place in a tax-free environment (Roth IRAs or Life Insurance).
Feel free to ask me questions!
Angela
