Unbelievable Uses of Life InsurancePosted by Badger Coach on June 9th, 2014
For most people, the term “life insurance” does not foster warm fuzzy feelings. In fact, these words strike fear in the hearts of millions of individuals, except when the insurance company delivers a check to the deceased person’s family members. Today, I want you to learn that there is so much more you can do with life insurance other than bury someone.
There are a number financial authors, television personalities, and financial columnists offering their opinions about what type of life insurance you should buy. You are told to stay away from whole life insurance and to buy only term insurance. You are also told that insurance agents selling whole life insurance are only interested in earning a fat commission at your expense. This type of one-size-fits-all insurance advice is not only irresponsible, it’s downright dangerous. It is no different than a doctor prescribing aspirin for whatever ails you. If you need a heart transplant, take an aspirin. If you are experiencing pain during childbirth, take an aspirin. If you are suffering from traumatic injuries from a car accident, take an aspirin. If your leg is broken, take an aspirin. You get the point. Just like the insurance advice given by financial entertainers who want to stay relevant, this advice does not make any sense. However, since the stock market collapse of 2008 smart investors are now viewing whole life insurance as an asset class, because it has long-term return rates similar to 20-year U.S. Treasury rates.
The Purpose of Life Insurance
Life insurance is designed to do one thing and one thing only. And that is to provide income for the living and not for the dead. I do not know of anyone, nor have I heard or read a report of a deceased person, taking her life insurance proceeds with her to meet St. Peter at the gates of heaven. If you want life insurance to simply bury a loved one, look in to a funeral trust plan, which is not the same as a pre-need or pre-paid funeral plan. So, from this day forward, I want you to think about what life insurance can do for you while you are still breathing.
Uses of Cash Value Life Insurance
Life insurance can be used for many purposes: 401(k) alternative, help pay for a child’s college education, a down payment on a house, buy a car, invest in real estate, provide income during the loss of employment, pay for a wedding, take a vacation, supplement your income during retirement, or it can be used by as a tax deductible talent acquisition and retention tool by business owners. Cash value life insurance is so valuable to those in the know, because it also provides access to capital at a time when you need it most. Just ask some of the victims of the Bernie Madoff ponzi scheme, who said—but for cash value life insurance, we would be living out on the streets.
The True Cost of Insurance
For every dollar you spend in life insurance premium payments, a portion of it is used by the insurance company to pay salaries, overhead expenses, marketing, agent commissions, cost of insurance rates, etc., and the rest is deposited into your savings account. Unfortunately, some insurance companies may confiscate as much as 80 percent or more of your dollar for expenses, while others may take less than 20 percent over a 20-year period of time. The difference in fees charged will have a significant impact on your policy cash values. To find out if you are getting a good deal on your insurance policy, do not go to another insurance agent for the answer. Instead, contact Badger Coach or find a fee-only financial consultant who is qualified to run the numbers for you in a conflict-free environment.
Critics of permanent life insurance have also said that it costs too much. My response has always been, compared to what? If you compare premium payments to an estate tax liability, life insurance may cost less. If you compare policy loan interest rates to interest rates on a loan from a bank, the net cost of the insurance policy loan may cost less. If you compare premium payments to the all-in expense of a 401(k) plan, life insurance may cost less. And finally, if you compare permanent life insurance premiums to the Buy Term & Invest the Difference philosophy, permanent life insurance may actually cost less. Please note that I do not say that permanent life insurance “will cost less” as each person’s situation is different. Again, as I said previously, contact Badger Coach or use a qualified fee-based financial consultant to provide you with a cost benefit analysis to help you decide if life insurance costs too much for you.
Types of Life Insurance
There are two categories of life insurance—term (temporary) and permanent (for life). However, there are five types of life insurance between these two categories and they are as follows:
Term: This policy only provides coverage for 10, 15, 20 or 30 years. There are no built-in savings with this policy. At the end of the coverage period you selected, you must re-apply for coverage. Premium rates will be higher and you may not qualify for new coverage if you have a medical condition such as lupus, cancer, or if you have had a heart attack or a stroke. If you own or plan to own term insurance, make sure the premiums and the death benefit remain level (i.e., do not change) during the coverage period. And finally, term insurance is like car insurance in that if a claim is not filed (i.e., you do not die) during the coverage period, no benefits will be paid. And, unlike permanent cash value life insurance policy holders, people who buy term insurance are renting the policy for a select period of time.
Whole Life: This policy provides coverage for life, provided you pay the required premium payments on time. There is a built-in savings account within this policy. Once you are in the policy, your premium payments will never go up. Cash values (savings) are guaranteed to increase in value each year. Cash values can never lose value. Cash values may be accessed at any time and for any reason, and no questions will be asked. This is the only life insurance policy that can give you a return of any excess premium that you paid, in the form of a tax-free dividend. The dividend may be taken as cash or used to pay premiums. Dividends are not guaranteed to be paid every year.
Universal Life: This policy provides coverage for life. Premium payments are flexible. There is a built-in savings account within this policy. Cash values may be accessed at any time and for any reason, and no questions will be asked. Cash value growth rates are tied to an interest rate set by the insurance company, and this rate does fluctuate. Unlike cash values in whole life insurance, cash values in universal life insurance may lose value. And unlike whole life insurance premiums, once you own the policy, universal life premiums can increase and increase substantially. Also, if you do not pay the newly required higher premium, your policy will be cancelled. Buyer beware!
Index Universal Life: This policy provides coverage for life, provided you pay the required premium payments on time. There is a built-in savings account within this policy; however, the cash values in this policy may lose value if fees exceed earnings credited into the savings account. Cash values may be accessed at any time and for any reason, and no questions will be asked. This policy has only been on the market since 1997. There is a big push by insurance agents to sell this product, which has caused many agents to make misleading statements about this policy. Buyer beware!
Variable Universal Life: This policy provides coverage for life. Premium payments are flexible. Cash values in this policy are not guaranteed, as they are invested directly in the stock market. Cash values may be accessed at any time and for any reason, and no questions will be asked. This policy is the only type of life insurance that is classified as an investment. Therefore, it is accompanied by a prospectus and sold by a securities licensed financial advisor. Internal fees increase in value each year, reducing the amount of cash deposited into the cash value account. In years 12 to 15 and beyond, internal fees can also exceed premium payments, causing the insurance company to use your cash values to pay for your premiums. When this happens, you will experience a significant reduction in your accumulated cash value. Buyer beware!
Does Life Insurance Pay?
Life insurance products pay out an average $1.5 billion (www.securefamily.org) every day in the U.S., and Social Security pays out an average $1.9 billion per day to beneficiaries. These numbers are a clear indication of the importance of life insurance in our society. Once you understand how life insurance can help you enhance your lifestyle, you will want to own as much of it as you can afford and as much as the law will allow you to have.
Insurance Online & on T.V.
You can get almost anything you want off the internet or on television. All you have to do is provide your personal information for a “free” quote. Stop! The quote may be free, but it will cost you, as the marketer is selling your information to third-party entities. You will have to read the terms and conditions (i.e., fine print) to know whether your information will, in fact, be sold to someone else.
A properly structured cash value life insurance policy is designed to prevent you from paying more in taxes than you are legally required to pay, provide steady earnings on interest, provide alternative access to capital, empower entrepreneurs, and provide tax-free income. Life insurance—what an excellent way to live!
The opinions expressed are those of the author and is for educational purposes only, and not an offer to buy or sell securities. Investing involves significant risk, even the loss of capital. Invest only what you can afford to lose. Guarantees provided by an insurance company are based on its claims paying ability. Policy loans will reduce the death benefit, until repaid in full. Upon termination (not death of policy holder) of a policy, unpaid loans and the accrued/capitalized interest will be taxed as ordinary income. Unpaid policy loans may be taxed at ordinary income tax rates in the year of the lapsed, surrendered, or terminated policy. As always, please consult with a qualified legal, tax, insurance or investment professional before making any investment or insurance decision.