The Truth About Life Insurance

Myth: Cash value life insurance, like whole life, will help me retire wealthy.

Truth: Cash value life insurance is one of the worst financial products available.

Sadly, over 70% of the life insurance policies sold today are cash value policies. A cash value policy is an insurance product that packages insurance and savings together. Do not invest money in life insurance; the returns are HORRIBLE. Your insurance person will show you wonderful projections, but none of these policies perform as projected.

Example of Cash Value

If a 30-year-old man has $100 per month to spend on life insurance and shops the top 5 cash value companies, he will find he can purchase an average of $125,000 in insurance for his family. The pitch is to get a policy that will build up savings for retirement, which is what a cash value policy does. However, if this same guy purchases 20-year-level term insurance with coverage of $125,000, the cost will be only $7 per month, not $100.

WOW! If he goes with the cash value option, the other $93 per month should be in savings, right? Well, not really; you see, there are expenses.

Expenses? How much?

All of the $93 per month disappears in commissions and expenses for the first 3 years. After that, the return will average 2.6% per year for whole life, 4.2% for universal life, and 7.4% for the new-and-improved variable life policy that includes mutual funds, according to Consumer Federation of America, Kiplinger's Personal Finance, and Fortune magazines. The same mutual funds outside of the policy average 12%.

The Hidden Catch

Worse yet, with whole life and universal life, the savings you finally build up after being ripped off for years don't go to your family upon your death. The only benefit paid to your family is the face value of the policy, the $125,000 in our example.

The truth is that you would be better off to get the $7 term policy and and put the extra $93 in a cookie jar! At least after 3 years you would have $3,000, and when you died your family would get your savings.

A Better Plan

If you follow my Total Money Makeover plan, you will begin investing well. Then, when you are 57 years old and the kids are grown and gone, the house is paid for, and you have $700,000 in mutual funds, you'll become self-insured. That means when your 20-year term is up, you shouldn't need life insurance at all - because with no kids to feed, no house payment, and $700,000, your spouse will just have to suffer through if you die without insurance.

Don't do cash value insurance! Buy term and invest the difference.

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This content is provided by DaveRamsey.com and may be used only in its entirety with all links included. Dave Ramsey is changing the face of America by helping people understand life insurance and get on the path to being debt free.

http://www.daveramsey.com/the_truth_about/life_insurance_3481.html.cfm

Buying Life Insurance

by Suze Orman

It's empowering to be able to provide for yourself and your loved ones. One of the easiest ways is to make sure you have life insurance. Although there are many kinds (like whole or universal life), the only type you need is term insurance, because it's simple and affordable. Other plans include investing components, but you'd do better to buy the cheaper term policy and invest on your own. As its name implies, a term policy is one you buy for a set time period tied to a specific need. For example, if you want to protect a baby until she graduates from college, you might buy a 25-year term policy. If you die within that period, the guardian would receive a payout to support the child. Make sure the policy is guaranteed renewable and that it has a level premium, meaning your annual payments won't rise for the duration of the policy.

Use the "rule of 20" to determine the death benefit: You want the beneficiary to be able to invest the payout and live off the income, so he or she doesn't have to worry about eating into the principal. This means the death benefit should be 20 times the annual income you need to replace. If the goal is to replace $50,000 in annual income, you'd want to buy a $1 million policy. A 40-year-old woman in good health could get that coverage for about $100 a month. That way, the $1 million could be invested in high quality municipal bonds—which today pay about 5 percent interest—and generate the needed income.

source: http://www.oprah.com/article/omagazine/omag_200603_suze

Suze Orman's What-If Policy

by Suze Orman

Suze Orman shares her "What-If" Policy.

What if something were to happen to your spouse? Would you worry that his/her life insurance wouldn't be enough to cover your expenses? Here's how to plan for the worst so you're not faced with a major dilemma

Types of Life Insurance
There are two broad types of life insurance—term and whole life. Whole life policies provide insurance for your entire life as well as a savings component, but they come with hefty commissions—up to 80 percent of your first-year premium—that are not worth it at all. There are plenty of savings plans other than an insurance policy that are a far smarter move. With that in mind, in my opinion, the only type of life insurance that makes sense is term, which is good for a specific period of time. The premium is based on your age, gender, health, the death benefit desired, and the term.

How Much
Here's how to figure out how much insurance coverage you need:

- Determine the amount of money the survivors would need to maintain their standard of living if the insured person died. Let's assume it's $50,000 a year.
- Multiply that amount by 20. In this case, you want to purchase a $1,000,000 policy. Why multiply by 20? Interest rates are currently at about 5 percent, and if that death benefit is invested at that rate, it will get $50,000 annually in pretax income without touching the principal

How Long
I think you should have insurance in place until you're at least 65. Assuming you save for your retirement, once you reach 65 you won't need insurance because you'll have sufficient income from your retirement accounts, pensions, and Social Security

The Cost
The younger you are when you purchase a policy, the lower your monthly premium. For example, a 35-year-old woman in good health might pay about $70 a month for a $1,000,000 level-term policy over 30 years. A healthy 45-year-old woman purchasing a $1,000,000 policy for 20 years could pay about $90 a month; the monthly premium for a 45-year-old man will be in the vicinity of $120 ...

source: http://www.oprah.com/article/omagazine/omag_200401_suze

How to Buy Life Insurance

by Suze Orman

Those who depend on your income—from young children to elderly parents—also depend on you to have a life insurance policy. Luckily, buying one has never been cheaper or easier. Here's what you need to know:

Stick with Term Insurance
With the exception of a few situations (supporting a special-needs child or sibling; for estate tax purposes), the only kind you need is term. As the name implies, you buy a policy for a set period—anything from a year to 20 or more. Should you die during that time, your beneficiary gets the death benefit on your policy. If your goal is to protect children, choose a term policy that will give you coverage until your youngest is 23 or so; by that time, kids can support themselves.

Buy a Generous Policy
Specifically, you require one with a death benefit that equals 20 times your loved one's annual needs. I know that sounds like a lot, but if a child or parent requires $50,000 a year for living expenses, that works out to a policy with a $1 million death benefit. I suggest replacing 20 times their annual expenses so that your survivors can invest the money conservatively and live off the interest rather than eat into the principal. The amazing thing is that a 20-year, $1 million policy for a 40-year-old woman in good health can cost just $850 or so a year, or less than $75 a month. Make sure your policy is guaranteed renewable: As long as you pay on time, it can't be canceled.

Never Make a Minor Your Beneficiary
No life insurance company will write a check to a juvenile. If you name your child as the beneficiary, he and his guardian will end up in court, where a judge will become the overseer of the money. Avoid that by setting up a living revocable trust and making the trust, not a person, the beneficiary. Whomever you have appointed as the trustee will be able to use the funds to take care of your child according to the directives you've laid out.

source: http://www.oprah.com/article/omagazine/omag_200801_suze

Don't Let the Kind of Life Insurance You Buy Kill You

A Suze Orman exclusive

When you become a parent you are making an irrevocable pledge to take care of that child in every way possible. So you need to make sure that no matter what happens to you, your child will be financially okay. By that I mean that your spouse or partner, or a guardian, would have the resources to raise your child if something happened to you.

Yup, we're talking about life insurance. Don't give me that glazed-over look. It isn't nearly as difficult to figure out as you might think, and it is the single biggest gift you can ever give your loved ones - especially if you are a single parent.

There are a variety of types of insurance on the market, but you can make the shopping easier by focusing on what is known as Level Term Insurance. As the name implies, you will be covered for a certain "term" of time, anywhere from 1 to 30 years. "Level" means your monthly premiums will stay the same during the entire policy period. If you die during the term, your death benefit - which will be income tax-free, as with most types of life insurance - would pass to your named beneficiaries on the policy. If you live out the length of the term, you get nothing at all.

So now let's say you do live longer than the term of the policy you buy-what then? Well, first of all, congratulations; the primary reason to buy life insurance, in my opinion, is to make sure that while you are young and haven't had a chance to build up your assets, you still have a way to protect those who are financially dependent upon you in case you die unexpectedly. As you get older and hopefully acquire more assets, and as your children become independent, the need for insurance steadily lessens and may even disappear completely. But if that's the case, then why, you will almost certainly find yourself asking, is my insurance agent making me buy another policy to cover the rest of my life? That is the $64,000 question. And the answer involves whose pockets the money ends up in: yours or the insurance agent's. The kind of life insurance policies that many agents will tell you about are known as variable life, whole life, or universal life. You will hear that these policies are the best way for you to save for your future-tax free-as well as insure you to the end of your life. But here's what I will tell you that they probably won't: Many (not all, but many) insurance agents love to push these policies chiefly because they reap big commissions, especially in the first year of the policy when the majority of the premium goes to them. It is an argument I have been having with agents for years, and will happily continue to do so. In my opinion, level term insurance is usually the best way to go for the vast majority of people.

How Much and for How Long?
Before I explain why term is the only kind of life insurance I want you to buy, first I want you to know how to decide how large a death benefit you want for your policy, and how long you want that death benefit to last. My rule of thumb with term life insurance is to always anticipate the worst case scenario and then buy enough insurance to cover you and your family if the worst comes true. I know you think it can never happen to you. So did the brand-new parents in Connecticut I remember reading about earlier this year, whose car was crushed by a tree. They were both killed in the accident; their baby was found unhurt. We are not comfortable thinking in terms of sudden and total catastrophes like this, but unfortunately they do fall within the realm of the possible. Don't assume, for instance, that your spouse will survive you and be able to support your child after a period of transition. Buying only enough insurance so your loved ones can get by for a few months or a year is simply failing to fulfill a critical obligation to your family.

The Magic Formula
Let's say you want to make sure that should you die your beneficiary would have an income of $100,000 a year for the rest of their life. That means you want a death benefit large enough to generate $100,000 in annual income. To figure that out just multiply the yearly amount of income you want your loved one to have by 20. In this case, $100,000 a year multiplied by 20 equals $2,000,000. Why 20? It all has to do with the rate of return your beneficiaries could earn on the death benefit payout. And I want you to play it conservative, so we are going to do our calculation based on a 5 percent rate of return, which is what you probably can get on a high-quality individual bond investment. So a $2,000,000 death benefit invested at 5 percent will give your beneficiaries the $100,000 a year of desired income.

The Term
Next, you need to decide how long you want your policy to last. That's what is known as the term. You should choose a term that lasts until your youngest child is about 24 years of age. By that time, a (grown) child should be able to take care of himself or herself if something were to happen to you. (A side note: If you do not have kids but there is someone in your family who is financially dependent upon you, choose a term that gives you enough time to build up your assets to the point where you will no longer need the insurance.)

Who Shouldn't Buy Life Insurance
If you do not have kids and no one is financially dependent upon you, you do not need life insurance at all. And don't go buying life insurance on those kids of yours. That is the biggest waste of money you will ever spend�but that could be a whole other article.

source: http://biz.yahoo.com/pfg/e12baby/art011.html

Determining our Life Insurance Needs II – Scenario

This is the continuation of Determining our Life Insurance Needs I - Criteria read the Part I first before reading this Part II.

Million Dollar Journey
Building Wealth through Saving and Investing

Written by FrugalTrader on Mar 3, 2008 filed under Insurance

Yesterday, I wrote about the criteria that needs to be considered when calculating life insurance needs. Today, I'm going to calculate our personal requirement for life insurance in case the worst happens.

Note that the insurance requirements for each spouse would be different if one spouse made significantly more money than the other spouse. However, in our household, we make approximately the same income.

So looking through those criteria, here is what our financial picture would look like if one spouse were to pass:

• Existing Life Insurance Benefit: $100k
• Household After Tax Income: $3,200/mo
• Portfolio value: $100k
• Debt load if one spouse were to pass: $210k (mortgage and heloc)
• Household Expenses: $2,900/mo (no mortgage/rrsp contributions/1 car eliminated)
• Ongoing Childcare Expenses (20 years): $1,000/mo
• Education fund: $40k
• Funeral Expenses: $10k (CPP pays $2,500 upon death)

Lump Sum Debt

So first, we need to cover our big debts which include our future mortgage and HELOC of $210k an education fund of $40k and 10k funeral, making our lump sum debt of $260k.

Cash Flow Requirements

The next coverage we need to look at is cash flow. Will the surviving spouse make enough in regular and portfolio income to cover the monthly expenses?

If not, the insurance benefit should make up the difference. For us, expenses would be around $3,900/month including child care expenses. This leaves us with a cash flow deficit of around $700 / month.

We'll assume that salary raises match inflation and the insurance proceeds are reinvested in a non-registered portfolio and/or savings account.

Total Life Insurance Required

Right off the bat, we need a $160k lump sum pay out after the existing $100k life insurance is accounted for.

The $700/month or $8,400/year shortfall must be covered though a combination of the existing portfolio/cash and additional insurance. Also note that income provided from a portfolio is taxable, thus must be accounted for in the calculations.

Our $100k portfolio/cash would hopefully be invested in growing dividend paying stocks (growing at the rate of inflation) paying out an average of 2.8% (after tax) or 3.5% before tax (NL tax rates). This would bring in an additional $2,800/year initially leaving a shortfall of around $5,600/yr.

The shortfall lump sum amount required can be calculated with a couple of methods.

1. Use all of the lump sum payout over 20 years: $5,600 x number of years required (20 years for us) = $112,000 (invested in a high interest rate savings account to counter inflation).
2. Keep the insurance proceeds for life: $5,600/0.028 which pays dividends based on the payout = $200,000

Adding everything up:

$160k lump sum + $112k for cash flow supplement = ~$272k (no insurance benefit left 20 years after payout)

or

$160k lump sum + $200k for cash flow supplement = ~$360k (insurance benefit remains intact)

Note that the insurance requirements would be even less should we decide to deplete our $100k portfolio/cash to $0 after 20 years instead of trying to keep the capital in tact. However, I would feel more secure knowing that my wife would have an additional growing income stream for life.

Final Thoughts

Of course, as our net worth and savings grow, we will be less and less dependent on life insurance to financially protect our family. Our plan is that in 20 years when our term life expires, we'll hopefully be completely self insured. As of right now, we'll most likely be going with the lower amount of coverage.

The key point is that life insurance is to protect dependents against financial hardship not to make anyone rich.

Source: http://www.milliondollarjourney.com/determining-our-life-insurance-needs-ii-scenario.html

Determining our Life Insurance Needs I – Criteria

Million Dollar Journey
Building Wealth through Saving and Investing

Written by FrugalTrader on Feb 26, 2008 filed under Insurance

People generally don't like talking about death, especially planning for it. I'm no exception, but with the new home and child coming, I'm looking into insurance more seriously. Before, with both of us working and make comparable income, life insurance wasn't really a consideration because there weren't any financial dependents in the picture. The only thing we had covered was the mortgage via mortgage life insurance.

With the new home, we're going with term life insurance instead of typical mortgage life insurance. Why? The reason being is that mortgage life premiums stay the same with a decreasing benefit. Term life benefits, however, do not change over the term.

Why not go with whole life or universal life? To me, those products provide sub par investment return for the extra premium charged. I'm planning on buying term life and investing the rest myself.

Hopefully, by the time that the term insurance expires (20 years), we'll have a large enough portfolio to be self insured. If not, we'll continue to buy just enough term insurance to cover our needs.

If you want to read another opinion on term or permanent insurance, you can read Ed Rempel's article with this thoughts on universal life insurance.

So looking at the worst case scenarios, how much life insurance do we need? Here are some of the factors to consider:

Assets

• Existing life insurance
• Household after tax income if one spouse were to pass
• Portfolio value (rrsp, non-reg, cash)

Liabilities

• Debt load if one spouse were to pass
• Household/Childcare expenses if one spouse were to pass
• Child's education fund
• Child requirements if both parents pass
• Funeral expenses

Tomorrow, I'll get into the actual numbers of our insurance requirements. What factors do you consider for the amount of life insurance that you need?

source: http://www.milliondollarjourney.com/determining-our-life-insurance-needs-i-criteria.htm

READ the continuation Determining our Life Insurance Needs II - Scenario