Life Insurance – Inheritance

I received a question this week in regards to feedback on insurance matters at retirement and how should one consider the inheritance for your children. As we are living longer, are whole or universal life policies more relevant? 

The reality whether we want to believe it or not we all are going to dissolve one day. It’s not a matter of if but when. I hope we all live for a long time.
 
If you have kids or a spouse that depends on your financial resources you should exercise wisdom and ensure you have life insurance and the practical amount of coverage for your dependents. (10 – 12 times your income) 

Your kids can’t inherit what you don’t create!    
There are two types of insurance. There’s cash value and term insurance. 
With term insurance instead of spending $100 a month for a whole life insurance plan you spend $5 a month in this example. Where does the remaining $95 go? It goes to build a savings account inside the whole/universal life policy called cash value. This is the very reason why people buy whole/universal life insurance because of the cash value and tax free implications that comes with it. Essentially it builds up savings.However, the problem with whole/universal life policies is what happens to the savings in the cash value. On average the cash value gains 1 – 1.5%, it’s a horrible rate of return.

Secondly, if you want money out of the whole/universal life policy, you have to cancel the policy or borrow the money from your own policy. Now you put the money in there but when you take it out on a loan, you pay the insurance company interest to borrow your money. You wouldn’t take money from a bank savings account and give them interest to borrow your own money would you? Most whole/universal life policies fees are front loaded so you pay a lot initially. In the example above insurance agents get paid on the commission of $100 versus the $5. 

Let’s make this practical, let’s say you have $200,000 whole/universal life policy and you have a cash value of $50,000. If you were to close the policy you would get $50,000. You’ve paid extra for that $50,000 to be in the policy. So that’s $50,000, is your money so to speak. The problem is this, the person that the insurance is on dies, the insurance company will not pay the $200,000 face value and $50,000 cash value. They pay the $200,000 as the death benefit. Well you may ask what happened to the $50,000 savings (cash value). The insurance keeps this. This is why whole/universal life insurance is one of the worst financial products. So you have a savings account (cash value) with a lousy rate of return when you die and the insurance companies keep your savings. There are 3 things that keep the middle class in the middle: 1) car leases 2) whole/universal life insurance and 3) credit cards. 
If you crunch the numbers on these 3 things, it will make you go crazy. They hold you back and not cause you to win. If you stay doing poor people stuff you will continue to stay poor. Actually you won’t be poor you’ll be broke, poor is just a state of mind. Don’t continue making the same mistakes over again scratching your head trying to figure out why you’re broke. Financial advising professionals don’t recommend whole or universal life insurance except people who sell it. To keep someone money after they’ve saved for 20 years at death is just a bad investment. That’s what this situation comes down to.

My recommendation is to buy term life insurance. But one may ask term insurance runs out. Well if you quit paying the premiums on your whole or universal life insurance that policy will get canceled. For $5 you can buy as much term life insurance on a 20 year level term as you can for $100 buying cash value life insurance per month. I always advocate investing. In this case use the difference of $95 and use it and invest wisely. $100 per month x 40 years growing at 9% average annual return will grant you $441,950. Imagine what $200 per month over this period will grant you. If you had $1,000,000 at the age of 50 with a 401k at minimum and no other assets, do you think you need life insurance at this point? 

As we close this week, close your eyes and think about these 3 things: 1) What happens when you pass? 2) What happens if you become incapacitated? 3) What is the legacy you want to leave?

Your personal finances don’t need your personal excuses! 
If you’re uninsured let’s go and take action!