Life Insurance 101

In this post, we will discuss the basics of Life Insurance, why you need it, how to get it, and what it can do for you.

Why Do People Buy Life Insurance?

  1. To protect themselves and their families against a loss of life.

What is Term Insurance?

Term insurance is purchased for a specific period of time to prevent against a loss.  This type of insurance would be carried when you only want to protect yourself against death for a time frame.  Let’s say you have kids in the house and you want to ensure they make it through college and you can keep food on the table.  You may also use term insurance to protect against debt and loss of income.

How Much Term Insurance Do I Need?

To calculate the amount of term insurance, you can start by adding up your debt plus your salary times the number of years you want to be protected.  You may also want to purchase enough insurance that will pay off all your debts and allow your beneficiaries to live off the interest.

What Is Whole Life Insurance?

Whole life was actually created to ensure the death benefit does not go down as you age.  You actually will end up paying more money for whole life insurance.  The extra money will go into a cash account that grows with the policy.  This reduces the risk for the insurance company since the policy will carry a cash value.

When you take out a whole life policy, there is no changing it and you need to keep paying yourpremiums until you die.  Whole life has very strong guarantees.  It will tell you for sure where your policy will be at periods in the future.

Drawbacks of Whole Life Insurance

  • Not being able to change the payment amount
  • Sold to people who don’t need it
  • You do not know the returns as it changes annually

More Information on Whole Life Insurance

  • Most dividends from whole life insurance end up being around 5%.
  • Whole life does not really fit most people’s needs and they should opt for term.

Universal Life Insurance Policies

  • Designed to track interest rates
  • Very flexible – you can change the premium amounts.
  • Universal Life Policies have minimums and maximums
  • You can change the death benefit on a universal life policy

What happens when interest rates plummet? You simply create a new type of product!

Variable Universal Life Insurance Policies

  • Variable Universal Life Policies are tied to the stock market
  • You can tie your cash value to mutual funds – this is much riskier!
  • You may end up paying more money if the stock market gets hit
  • Variable Universal Life Policies typically have higher fees

Equity Indexed Universal Life Policies

  • Policy tracks the market (S&P 500, Chinese Market)
  • Also tracks interest rates
  • If you are tracking the EU market, you get a percentage, up to a cap for example

Be very cautious with any of these policies and look for a full waiver of surrender charges.

What is a Full Waiver of Surrender Charges?

  • With whole life, you don’t have cash surrender value
  • Allows you to get to the cash balance with no wild charges or penalties for accessing the cash value