Can you explain what life insurance is and how it works? Is it a smart move for me to invest in life insurance?
I am a 26-yr-old male in good health and about to get married next year.
Answers | 4
You’ve packed at least 3 things into your query. First, what is life insurance? Life insurance is a contract that you may enter into with an insurance company which causes a death benefit to be paid to your beneficiary when you trigger it. That is, when you die. The premium (what you pay for this contract) is never as large as the death benefit, and there is no other way that you can turn a little bit of money into a whole lot of money in a little bit of time – perfectly sized to the need, and at the exact moment it is needed – than with life insurance. Is this a simplified definition? Yes. Is it an accurate definition? Yes.
Second, how does it work? You apply, get approved, the policy is delivered, you pay for it and then, well, you know the rest. A bit of detail might help here. Term insurance is just coverage (the way auto insurance or home insurance is just coverage). It lasts for a period of time and then goes away or gets tremendously expensive after the level period of 10/15/20/30 years.
Permanent insurance, of which there are several flavors, lasts for the rest of your life so you can’t outlive it. Permanent plans come with a cash value component. You can use it to create a “bank” for yourself or you can simply use it to have a permanent benefit and ignore the cash accrual part. There is more but as with most things insurance, you can get down a rathole real fast with all of the various ways to manipulate the contract based on specific needs and desires. Think about that computer you are using right now. How many ways can you customize it? Software, hardware, networks, programs, browsers. You get the point.
Third, is it a smart move for you to “invest” in life insurance? Take that apart first. Is it a smart move? Yes, if you have someone who will have a financial hardship if you leave the planet. If you save up, and then you die, the amount needed may not match what is in the savings account. Example: you save $100 a day for 50 days. You die. Your loved ones get $5000, but they need $100,000. Oops. Or, you save $1000 a day for 50 days and then you die. They get $50,000. If the cost to get through life for them for 1 month is $2,200, the bucket of money will last for about 23 months. At month 24, they are in need. Oops again.
You used the word “invest” and that needs clarification. Should you pay a small premium to get jumbo sized protection for loved ones? A responsible person would do that if there was not a pile of cash laying around already allocated for this purpose. Should you “invest” in permanent life insurance to get a good return on your money? Maybe. Maybe not. I did. But that universe of need, affordability, future planning, policy type and features, plus time value of money (and some other things) pointed the way for me. I have 3 permanent plans. One makes it possible for me to pay for 10 years, stop paying, have the death benefit continue forever, and generate a PILE of cash in the policy based on a guaranteed interest rate that would impress you. If I die while smiling about all of that, my wife will do my smiling for me. Do I actually “invest” elsewhere? Yes; IRA/M-fund/and some others. Can either of those investments do what life insurance does? No. And that is why I have it!
1. It's like a 401k in that you can chose the amount you want to contribute monthly
2. Because the plan is "Indexed" you have ZERO downside risk when the stock market drops, and an upside potential of 13% annually when the market is climbing. In other words, your gains are locked in each year when the market is rising, and you avoid portfolio killing down years when the market is falling.
3. Based on your age and monthly contribution, a life insurance policy is established for an amount that is within the IRS guidelines that allows you to withdraw your money TAX FREE at any age.
4. The Living Benefit rider is a no cost option, and allows you to access your life insurance face amount should you experience a critical illness like cancer, heart attack or stoke, in additional to chronic illnesses as well.. This tax free cash is available to use in any way you see fit, including paying bills, mortgage, college fess for the children, should your income suffer at work due to your illness, or even use it for life saving treatments that may not be available in this country.
5. When you are ready to retire, you can turn on a guaranteed lifetime income stream that you can not out live, and it's Tax Free cash.
6. Upon your passing, you will pass on a death benefit to your heirs that is estate and inheritance tax free.
Please feel free to contact me for an illustration of exactly how this all works.
All the intellect is nice, but at the end of the day, if you have something to lose, then you insure against the risk. We are all going to die! Life insurance has many faces, but the basics are: it pays your beneficiary's-i.e.; wife/partner, business partner, children, a lump sum in the event of your death, to allow them to continue their lives, or business, without you there contributing. Call me if you are interested in Term Insurance.