by Marc Smith
As you evaluate your life insurance needs, you’re undoubtedly going to hear about a variety of different plans. Whole life, cash balance, level term, etc. The only life insurance 99% of people need is a basic term insurance policy. They are highly cost effective, cover you for the keys needs in your life and pay the lowest commissions to insurance salespeople. Contrast that with whole-life, which pay great commissions to salespeople, and you’ll probably understand why many insurance salespeople will try and talk you into a whole-life plan.
The basics – Life insurance is necessary to help your surviving family pay living expenses with the loss of your income. It is there to help pay-off a mortgage or fund a child’s college costs. Notice the theme here – all of these expenses have a definite time horizon. If you have two kids, you shouldn’t need to pay for family living expenses for anymore than 22 years, right? If you’re paying your mortgage regularly, you’re balance is decreasing every month, so every year your need for insurance coverage on your mortgage decreases. If you have kids, they should be done with college in no more than 22 years, assuming your youngest was just born.
The point is, most of your major liabilities have a finite period associated with them, so there is no reason to pay the high premiums and high fees associated with a whole-life or cash balance policy. Many salespeople will tell you about the ‘great’ savings feature of those policies. However, you can save the difference in your monthly premiums between term and whole-life and end up way ahead over time. Additionally, if you are saving the money, you have access to the funds ANYTIME you want access. Many of these policies don’t allow you to access your paid in portion for a number of years. This isn’t even to mention the high embedded fees in whole-life or cash balance policies.
The reality is every insurance salesperson makes significantly higher commissions from selling you anything other than term insurance, so they will find any reason under the sun to convince you it is better. In fact, if someone is steering your to anything other than a simple term life insurance policy, you should ask them exactly what commission they will receive from selling you a whole-life policy versus a term life policy. Then you should find a new insurance salesperson.
Tomorrow we’ll discuss how much life insurance you need. Read it Here