Life insurance, you can’t live with it and you can’t live without it or can you?
There are basically 2 types of life insurance. The Whole Life, Universal Life, Variable Life and Variable Universal Life Policies are all basically the same. You may find some slight differences but they provide the same basic plan.
You are most likely to be paying a higher premium. The insurance company will originally be taking the extra amount you are paying in premium to cover “costs”. After a year or two of that, they will start investing the extra premium for you. You will slowly see the investment side of your policy grow. You will eventually be in a position where you have enough in you investment side to pay your premium so you will have a “free” policy. This all sounds really good, you are not only covering yourself with life insurance but you are also investing as you go. The problem with this policy is when you die; your beneficiary will only get the face amount of the policy. If you took out a $100,000 and have accumulated $50,000 in investments, your beneficiary will only get the $100,000. The insurance company keeps the $50,000 that you have worked so hard to invest. Another problem with this plan is the money that the insurance company is investing for you is only earning 2-5% interest. You can easily make 10-12% in Mutual Funds.
Term Life insurance is much cheaper but just as the name says it is for a “term”, usually 15, 20 or 30 years. The problem with Term Insurance is at the end of the term, if you renew, your premium will greatly increase. If, for example you are 30 years old and take out a 30 Term policy, your premium will be extremely cheap. A 30 year old man can take out a 30 year $100,000 Term Insurance Policy for about $110 per year. When it comes time to renew the policy, you will be 60 years old and your premium will be in the neighborhood of $281 per year and you won’t be able to get a 30 year term, they would only give you a 20 year term because of your age. The good news about Term Insurance is that if you take out a policy and invest the difference between what a Whole Life premium would be and a Term Life premium you would be able to be self insured at the end of the term.
Let’s look at an example. If you are 30 years old and take out a 20 year term life policy for $100,000 your annual premium would be about $110. That is about $9 per month. I was paying $125 a year for a $10,000 Whole Life policy so let’s just multiply the $125 times 10 and that should be about a $100,000 policy premium for Whole Life. That means $1,250 for the Whole Life and $110 for the Term policy. If you took the difference in monthly premiums, which is $95 per month and invested it in a Mutual Fund that averages 9% growth, at the end of 20 years you would have about $50,000 and that should be enough to bury you. I used conservative numbers to get that figure; you can easily get 10-12% in Mutual Funds. If you are also investing in a 401k, IRA or Mutual Funds your beneficiary should have at least another $100,000. Again I am using conservative figures.
If you can become debt free, you can throw a lot more money into Mutual Funds and you can easily be sitting with hundreds of thousands of dollars in your 401k, IRA and/or Mutual Funds after 20 years. At that point, you won’t need Life Insurance.
In my opinion you need Term Life insurance for about 20 years, by then if you are smart with your money, you should be able to be self insured.