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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.