Personal Finance 

What Kind of Life Insurance Do I Need?

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Travelers InsuranceWho brings in the cash at your house? Is it you? Your spouse? Both of you? Although none of us want to think about this, what would happen if the person in your home responsible for bring home the paycheck were to suddenly pass away? What would happen if tomorrow, you had to not only bury your spouse, but you also had to figure out where the money was coming from to pay your mortgage, car loan, credit cards, school loans, and other obligations? What if you have been a stay at home spouse all of your life and are now faced with a house full of children and very little in the way of marketable skills beyond what would be considered unskilled labor in the marketplace?

We don’t want to think about these questions but it’s a new year and for the protection of your family, it’s time to take a few minutes and think about it. Here’s the most basic answer to all of these questions: If there is one person in your family who is solely responsible for producing the income in your home, you need life insurance. Here’s what you need to know to get started.

How Does it Work?

Life insurance is designed for the unfortunate situation above. If the person who produces the majority of the income in your family were to unexpectedly pass away, life insurance replaces that income. Unfortunately, life insurance can get complicated but if you’re looking for a simple policy that replaces the lost income, all you need is a term life policy. If you take out a $200,000 term life policy, upon the person’s death, you receive a lump sum payment of $200,000. Because of the simplicity of the policy, you can get numerous quotes and easily compare the policies.

What is Cash Value?

Here’s where it gets complicated. Nearly 70% of all life insurance policies include a cash value component. Think of the cash value component as another way of saving for retirement but according to best selling author Dave Ramsey, it doesn’t work that way. Ramsey says that a $125,000 cash value policy will cost you about $100 per month compared to $7 per month for a term life policy if you’re 30 years old. With the cash value policy, until all of the fees and commissions are paid, about three years, you don’t have anything to show for the added cost. In addition, the returns average up to 4% less than they would if you bought the same mutual funds outside of the life insurance policy.

What Should I do?

Ramsey, as well as other personal finance experts advises paying for a term life insurance policy and investing the rest in an IRA where the returns will be higher and the fees lower. Keep your insurance products easy to understand by not adding an investment component to them. Also check with your employer. Many employers automatically enroll their full time employees in to a term life insurance program. You might already have it and not know it.

(Photo: mfhiatt)

{ 7 comments, please add your thoughts now! }

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7 Responses to “What Kind of Life Insurance Do I Need?”

  1. Ron Mexico says:

    I’ve read that with a term policy after the initial level premium-paying term expires the costs get very expensive. So is there really any benefit there? Eventually the money you saved that you’re putting in an IRA will just have to go back to paying for the policy.

  2. Strebkr says:

    Term Life > Whole life with very FEW exceptions. For high income earners it can provide some tax shelter. For the average Joe, get a term life policy and save the rest of your money.

    Insurance and Investing were never meant to be mixed!

  3. mannymacho says:

    Dave Ramsey always uses a consistent 12 percent assumption for mutual funds and it drives me nuts. Of course with that assumption mutual find investing trumps anything.

    Despite the constant screaming against it, whole life insurance can make sense for a lot of people, it’s not as simple as a > b. It is mainly important to understand the various strategies with each.

    • I really hate some insurance agents and “experts” that tout whole life as an investment and try to compare those policies to mutual funds.

      Life insurance is not an investment. It will grow cash value, yes. The cash is a reflection of the policy reserves that the company has to keep on the policy. If you need permanent protection that is guaranteed to be in force when you die, then this is it.

  4. Chris says:

    How is whole life a tax shelter
    And what is a high income earner
    Above 200k per annum
    Pls advise

  5. Chris says:

    What is the high earner income tax shelter whole life insurance provides
    And what is the annual salary of a high earner
    200 k per annum?

  6. fred says:

    Buying a house is a great goal for the New Year. Make sure that resolution has some back up with a life insurance policy. You can get a quick and easy quote from IntelliQuote in just minutes. Find out how little it could cost to keep (and protect) that home for future generations.

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