Insurance - You Bet Your Life on it!
Posted on September 26, 2007
Filed Under Home Finances |
What type of life insurance should I buy?
It is no secret that I am a student of pragmatism and simplicity. As such, it is also no secret that I am a student of Dave Ramsey and a graduate of his FPU - Financial Peace University.
As a prudent student of financial products such as investments and insurance, one of the first steps in truly learning the lesson is to truly understand the objectives of those products and their types.
When the purpose of life insurance is to financially protect your loved ones in the event of your untimely demise, then the product you buy should do just that. Insurance is not an investment vehicle, though it is often sold as one. There are lots of different type of life insurance, but the type to go with is term life. It is called “term life” because it is quoted for a specific period of time - or term. When the term is over, you no longer pay premiums, and you are no longer covered.
When insurance is bundled into some sort of investment vehicle, it is not longer conforming to the specifications of what insurance is. (Editor’s note: I just started to go into an elaborate anaology using airline tickets vs. travel package, but decided to delete it to keep it simple).
In keeping it simple, the way I see it (and am in very good company), if you want insurance, then buy insurance.
If you want to purchase an investment, then purchase an investment. But, if you want insurance and you want an investment, purchase insurance, and then purchase an investment. Insurance is not designed to be a retirement savings vehicle. Here is why…
The insurance agent makes money from the commissions he earns by selling insurance. When he sells something with a bigger commission, he earns more money. Whole life and variable annuity types of insurance (among others) provide a bigger commission.
To be fair, these non-term-insurance types do actually have an investment component - and probably usually a legitimate one. “So”, you ask, “Then what’s the problem?” Simply this, by the time you have paid for the cost of insurance and the built-in product and portfolio management fees, your non-insurance paid-in money would have bought more in terms of investment and would be able to earn you more money in interest if put into a mutual fund.
If you are already committed to a whole life or variable life or some sort of annuity policy, then you would do well to do some research - check with an experienced and trustworthy financial advisor - to see whether divesting of that policy and going with term life is the best thing for you to do. And check carefully indeed. As a matter of fact, I do know of at least one person who has a variable life policy that was purchased over 10 years ago, and it is better for him to hang on to it at this point. However, he has supplemented it with term life to accomplish the amount of coverage that his family would need if he were to die with young ones still in the house.
Take the time while you have time, and assess your life insurance needs.
Best Regards,
Stephen Dunbar
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