Download Life Insurance

Life Insurance
Class Notes
1. Why we need it:
a. Life insurance covers the buyer’s dependants should something
happen to him/her. For example if the buyer was killed in a place /
car crash, or fall terminally ill their spouse and children not only
would lose that loved one but also lose his/her income. This may
result in the added difficulty of the remaining spouse trying to work
and raise kids (very hard) or moving out of the family home into a
different neighborhood in order to make ends meet.
The sole purpose of life insurance is to replace your income in case you
die, so that your dependents can maintain their current lifestyle.
Factors to consider include:
Surviving partner may have child care expenses.
Do you have other assets on which to draw?
Will your children be out of the nest soon?
Can the surviving partner pay the mortgage, bills etc?
Life insurance will ensure that in the event of one parent’s untimely
death, the family unit will be financially secure.
2. Term Life Insurance:
a. No investment component
b. Coverage that lasts for a set term: 15 years, 20 years
c. You pay fixed monthly / annual premiums.
d. Buy it when you are young, it’s much cheaper then.
e. The amount you pay usually doesn't change throughout the life of
the policy
3. Whole Life Insurance:
a. Has an investment component
b. Pays a stated, fixed amount on your death
c. Part of your premium goes toward building cash value from
investments made by the insurance company.
d. You can borrow against the cash accumulation fund without being
taxed
e. The amount you pay usually doesn't change throughout the life of
the policy
4. Universal Life Insurance:
a. Combines term insurance with a money market-type investment
that pays a market rate of return
b. To get a higher return, these policies generally don't guarantee a
certain rate.
5. Variable Life Insurance:
a. Investment fund tied to a stock or bond mutual-fund investment
b. Returns are not guaranteed.
Insurance companies tend to exaggerate the annual yield of investment
linked polices. This is to draw more people toward the policies which are
highly profitable for the insurance companies.
“Insurance companies pay fat commissions to their agents for selling whole-life
policies - perhaps 80 percent of your first year's premium goes to paying the
agent's commission - and the premiums for these polices are often five times that
of term. By contrast, the typical commission to the agent who sells a term policy
is about 10 percent.
It's no wonder, then, that agents push whole-life policies as if their livelihoods
depend on it, because, well, they do. If whole-life policies were beneficial to
consumers, our story would end here. The fact is the vast majority of those
who need insurance should buy term”.
Agents will argue that whole-life policies are superior because you can keep
them the rest of your life and build up cash in them tax-free, which can then be
borrowed. That's true enough, but they don't tell you about the

high fees and commissions built into whole life

surrender charges (if you want to cancel the policy) that often leave you
with little or no cash value five and even 10 or 15 years after you take out
the policy.
The point of a tax-free buildup of cash just isn't that powerful anymore, given the
proliferation of IRAs, 401(k)s, and other tax-advantaged savings vehicles that
have tiny commissions, much higher yields and complete portability.
Keep investing and insurance separate, stick with term, and do your investing
elsewhere.