1 - No one likes life insurance.
2 - Everyone needs life insurance.
3 - There are different kinds of life insurance.
The first one may seem odd to say coming from me, but it's true. It goes hand in hand with #2 and it becomes a "necessary evil".
Two of the main questions I get from people with regards to life insurance are, "What are the different kinds of life insurance?" and "What kind of insurance do I need?" As you can imagine the first one is pretty easy for me to explain but the second question gets fairly personal. The only way I can get the answer is through asking some personal questions and getting people to see how each kind of life insurance is there to fill a need of some kind.
Throughout the fact-finding process, many time it's uncovered that people have taken some time to listen to financial advisors, like Dave Ramsey, to help them decide the approach to take that makes the most financial sense. I can applaud their desire to make this move and it usually signifies a person who is looking to get something for themselves and their family that makes insurance sense and financial sense.
Fortunately I am aware of Dave Ramsey's main points on life insurance and I try to be responsible to my client as well as not offend Dave and his concepts for wealth management (which I appreciate very much).
The financial advisor has done their homework and they understand that term life is inexpensive and that whole life is more expensive. That's the easy part. The next thing they want you to be able to do it look at how much life insurance you need at that given time. Now, the way the financial advisor sees it is that a person should be able to take that amount of death benefit and do the math to see what a whole life type policy would cost and then compare it to a term policy. 99% of the time, the term policy is substantially less expensive. The financial advisor explains why they only need term life and that what they should do with the money they are "saving" by not getting a whole life option is to invest it into a savings account or something so that when the term life expires, they no longer need to purchase life insurance because they have funded their own death benefit with the savings account they started.
The concept is brilliant and I agree totally. However, the snags come in a couple of areas:
1 - The client may not be as committed to this savings as they may have led the advisor to be they were at the time they were meeting. It never fails. We get our finances in order and we're excited that we can see a positive turn in our debt to income ratio. We see ourselves finally taking control of ourselves and we commit to do better from that moment on. The reality sets in and the realization of life steps in a throws a big expense at us we were not expecting. Maybe we had time to squirrel away money for our grand plan, but when this unexpected thing happened we reached for our cash. That savings plan was used to handle the "rainy day" and came in handy but now we're down to $0.00 and we start all over again. The plan we laid out has just taken a hit and we're behind a big 8-ball. The time for our term insurance to expire comes to an end (20 or 30 years later) and we realize that we did not self-fund our insurance like we had planned because life happened. Our intentions were good but our reality set us back.2 - No one can tell you your last day (except God). We all want to believe that in 20 years we could accumulate enough money to fund our own burial and final expenses, but does anyone really know what that amount is? Right now, in my state, the average funeral cost is $12,000.00. That number will not get smaller as land for cemeteries will be depleted making it more expensive due to costs. The reality of term life insurance is that it's only good if you die in the term you purchased it for. Chances are that you are more likely to outlive your term life insurance and then you have the knowledge that you spent all that money and it's gone. The naughty little secret of life insurance is that the insurance carriers all have an idea (based on research and averages) how long you will live. Why do you think term life is so inexpensive? If every financial advisor who ONLY focused on term life could tell their clients when they were going to die, then we could all buy term insurance for the number of years we would need and call it a day.
SO...WHAT'S THE ANSWER?
It's different for everyone, but the best bet is to look at both sides of the coin and NOT overspend. Term life insurance is there for the times in your life where your dying prematurely could seriously effect a family or property. The whole life option is more likely to be what we die with. My advice...when you have need of life insurance it to try and mix it up. Just like with investing, don't put all your money in one thing. Fill the momentary need to leave larger amounts with term life. Do this when leaving those larger amounts makes sense. You also should think of the time long past those need years and have something waiting for you and your loved ones when the term life insurance expires (because no one wants to pay rates at the end of a term...trust me) with a whole life-type option. If you do this early enough in life, your expenses for life insurance are kept in check and you are even likely to still be able to save something for a rainy day. Also, since whole life does accumulate some cash value, if that rainy day is more than you have you may be able to borrow from the funds you have still accumulated through the whole life insurance.
Please understand, everyone is different but the basic rules should still apply with life insurance. The key is that whenever your final day is that you have money for your final expenses without the family you left behind having to take out a loan or "pass the hat" at your funeral. It's YOUR final day...don't make someone else have to pay for it.
If you have any life insurance questions, comments, or needs please feel free to email me at gene@generamsay.com. I'm an email away.
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