Term Life Insurance

Plan, Prepare, and Take it Easy with Term

If you are anything like me, you like to take immediate action. You like the feeling of getting stuff done and you need to know you are moving forward. Well, here is something you can and you should do immediately in terms of creating a solid financial plan. There isn’t anymore time to waste, so here it is: LIFE INSURANCE.

I believe the most important thing we can do with our money is to have life insurance. I don’t care where you are at in life or with your money, life insurance applies to everyone. Only two things are for sure: death and taxes. Taxes are easy because there really isn’t a choice, however you have a choice with life insurance. Make sure your loved ones are taken care of when you are gone. This is simple and something you can do today.

There are many different types of life insurance out there and it is important that we at least have an idea of how each one works.  These different policies can be very confusing and in-depth, so let me give you the cliff notes version of the basic life insurance policies available.

CASH VALUE POLICES (Whole Life, Universal Life and Variable Life)

About 70% of life insurance policies sold are Cash Value Policies.  These polices are sold as insurance and savings accounts bundled into one. The insurance part pays out the death benefit and the “Cash Value” is the savings account.

This may sound confusing, so let me put it into an example:

Jenny has a Whole Life Cash Value Policy. She is age 25 and purchases a life insurance policy that pays out $100,000 when she dies. Whether she dies at age 25 or 95, the plan pays out $100,000 to whoever she chooses as the beneficiary and it pays out tax-free.

This plan costs Jenny a monthly premium of $78.13 (quote taken from State Farm on 7/23/15) and that is a fixed amount that will never change for the rest of her life…hence the term “whole life”.

So now we know that with Whole Life Insurance, when you die, the benefit will be paid out. But what does this “Cash Value” term mean?  I am glad you asked.

The “Cash Value” portion of the plan is a savings/investment account that is set up within the insurance company that has the ability to earn a return (like an investment).  The account builds over time with your monthly premiums and compound interest until it matches the death benefit, which in Jenny’s case is $100,000.

Also, whole life policies usually end if the person lives until age 95 or 100 and in that case you would be paid out $100,000, which is now the value of your Cash Value savings/investment account.

So if you live to be 95 or 100, the insurance company doesn’t have to pay you out of their pocket, instead you are paid back what you have put into it.  If you die, the beneficiary (your family) will be paid the $100,000 death benefit and the insurance company keeps the savings account. 

 

(If this sounds like a terrible plan, you’re 100% right)

If Jenny pays $78.13 until age 95 she would have put $65,629.20 of her own money into the plan in form of premiums and she would collect $100,000.

That may sound awesome, but the rate of return on your “investment” is a lousy 1.1% because a large portion of the premium is covering the life insurance policy and fees. In addition, the Inflation rate in the U.S. has averaged 3% – 4% over the past 100 years, so basically you’re losing money over time.

So from just doing the math, Andrea and I do NOT buy any Cash Value Policies because in our opinion they are garbage.  In fact, the only people I have met that don’t believe WHOLE LIFE is garbage are the people selling this stuff. It’s crap and I would stay far away from it. This is my opinion only 🙂

Universal Life and Variable Life Insurance

Universal Life and Variable Life Insurance are also Cash Value polices that have more flexibility and are less expensive. These Cash Value policies transfer a little more of the risk away from the insurance company and onto the policyholder, and in return lowers your premium .

The main difference with Universal Life versus Whole Life is it gives the policy holder more flexibility to change the death benefit amount, change premiums, allow cash value buildup to pay premiums and not be “locked in” to a set premium amount for the life of the policy.

The Variable Life Insurance allows the same flexibility as Universal Life, but in addition allows the policyholder to choose their own investments through mutual funds within the insurance company. Andrea and I do NOT buy Universal Life or Variable Life because in our opinion they are also garbage.

The idea of Cash Value Policies is a good idea on the surface: These policies bundle life insurance with an investment account that accrues interest and you have the option to use the investment account to withdraw funds out of for emergencies, college tuition, life, etc. But here are some average rates that come straight out of Kiplinger’s Finance and other consumer reports:

The average return on investment after paying out commissions and expenses is:

•  Whole Life: 2.6%

•  Universal Life: 4.2%

•  Variable Life: 7.4%

 

Basically what we learned is if the life insurance company is in the business of selling life insurance…then just buy life insurance.  

Circle K (a gas station in Phoenix) sells gas.  They also can bundle that gas with a lovely Circle K Hot Dog.  If you have ever had one of these hot dogs you know that Circle K should remain in the business of selling gas and leave the hot dogs up to the restaurant/food people.

The same applies with investing.  If you are interested in investing for retirement (I hope everyone is) then wouldn’t you invest with investors/financial planners rather than with your insurance agent? This seemed to make sense for us.

Term Life Insurance

The most straight forward type of life insurance is called LEVEL TERM LIFE INSURANCE.

These plans are extremely affordable and cover you for a fixed term of your choice, usually 10 to 30 year terms in 5 year increments (10,15,20,25 or 30).

Remember Jenny’s Whole life quote of $100,000 at $78.13/month.  Well, if Jenny wants a 30 year Term policy for $100,000 it would cost only $10.35/month!  So, she saves $67.78 a month and if she invested that in the stock market for 30 years, at age 55 her investment would be worth $147,000!!

Now hopefully Jenny doesn’t die within that 30 year term, but if she did the beneficiary would be paid out $100,000 tax-free and the balance in her investment account would go to whoever she left it to in her WILL…not State Farm. If she lives to be 56, the policy would end and she would get nothing from the insurance company. Sort of like if you don’t get in a car accident, the car insurance people don’t give you your money back. DUH!.

 

So let’s break it down really quick:

 

Jenny’s Whole Life Policy:

  • Death Benefit: $100,000

 

  • Premiums paid out if you live to be 95 and never collect death benefit: $65,629.20 ($78.13 for 840 months)

 

  • Rate of Return on Whole Life “investment”: 1.1%

 

Jenny’s 30 Year Level Term:

  • Death Benefit: $100,000  (only good for 30 years or to age 55 in Jenny’s case)

 

  • Premiums paid out if you live past 55: $3,726

 

  • Save $67.78/month and invest that into stock market for 30 year term: $147,000 assuming return of 10% and reinvesting dividends

 
(If you don’t believe in a 10% average, then lets say only 8% return on investment which gives you $100,000 at age 55….still better than waiting 70 years for a 1.1% return and getting only $100,000. This isn’t a hard choice)

 

On a side note, Andrea and I are not mad at insurance agents. They have a job to do and their job is to sell all different types of insurance. We have some really great friends in the insurance business and we aren’t mad at them for selling what we refer to as garbage (sorry for calling it that). You shouldn’t be mad or offended either if you are pushed on buying the Cash Value.  The insurance agents have to make a living just like any one of us and that is simply what they are doing. Besides, 70% of the life insurance policies out there are Cash Value, so I think the insurance agents will survive.

 

You are going to be DEBT FREE. Once you are DEBT FREE; no credit card payments, no car loans, no student loans, no boob job loans, and no mortgage, imagine the wealth that you could build in 20-30 years!

However, during that 20-30 year period, insure your family in case GOD needs you sooner than you had anticipated at an affordable rate with Term Life Insurance.  It literally takes 5 minutes on the computer, about a week to process, and your family is protected if something were to happen to you.

I recommend you purchase 10 times the amount of your salary and $400,000-$500,000 for stay-at-home moms/dads.

Here are some quotes from an independent insurance broker – PolicyGenius

Male in good health age 35 making $50,000/year
Needs $500,000 in coverage for a 20 year term
Monthly Premium: $22.19

Female in good health age 30 stay-at-home mom
Needs $500,000 in coverage for 20 year term
Monthly Premium: $18.71

Male in good health age 30 making $100,000/year
Needs $1,000,000 in coverage for a 20 year term
Monthly Premium: $35.67

Please take action and decide to get Term Life Insurance today.  Even if you would like to get ripped off and buy a Cash Value Policy, at least you are doing something to protect your family in the event the unthinkable happens.

 

Young and Single?

 

I Would Still Recommend Purchasing Term Life Insurance

Vanessa was a student in one of the classes we hosted and she shared this with us:

Her father made her get Term Life Insurance when she was in her early 20s because he was smart. She at the time was single and was healthy. A few years after she purchased 30 years of Level Term, she had an aortic aneurism and almost died. Today she is fine, but no life insurance company is going to touch her – she would basically be un-insurable. However, since she had this prior to the aneurism, her family of four is now covered if something were to happen. You never know what the future can bring at no fault of your own.

What Can You Do Now?

There are no excuses for delaying this decision past today.  Get a quote right away with the Term Life Quote Generator above. You love your family, you would do anything for your family, so do this one simple thing. We did it and we sleep better at night knowing that we have taken care of our family and each other.

In addition, put together a Financial Drawer. If you were to pass on, wouldn’t it be nice for your family if they weren’t left having to pick up the pieces and then searching…..and searching…..and searching……for all of the financial information in your life. Andrea and I have everything organized into our Financial Drawer.

I sleep better at night knowing my family is protected if I didn’t wake up and they have instant access to EVERYTHING if they needed to get to it. Wondering what goes into a financial drawer? I have you covered!

 


NOTE: Andrea and I at one time had Cash Value Policies.  When we found out what we had, we immediately purchased 20 year level term insurance. Once we were insured, we called our former insurance agent and “nicely” asked them to give us the “surrender” amount or the “Cash Value”.  They sent us a check (reluctantly) and we used it to pay off debt.

Frequently Asked Questions

 

Can you increase your Term Life Insurance at any time? YES

 

How Much Coverage Do I Need? 10 – 12 times your gross income or $400k – $500k for stay-at-home Moms or Dads

 

Can you change beneficiaries at any time? YES

 

Can you cancel your Term Life at any time? YES…but why?

 

I have Life Insurance through my employer, should I keep it? I would ask your employer what happens if you were to leave your job. Often if you leave, the life insurance isn’t portable, meaning it doesn’t leave with you. In that case, absolutely purchase Term Life on the open market.

 

When should I cancel my Whole Life? Only once you have your Term Life in place, never before that.

 

What if I have Whole Life and can no longer get Term because of pre-existing condition? Keep the Whole Life. It is always better to be insured than not at all.

 

Should I take out a Life Insurance Policy on our kids? This sounds awful, but you can take just enough out to cover final expenses – funeral, burial, and the cost to keep you away from work so you can mourn. However, this is also what an Emergency Fund will do.

 

 

 

Lastly, if you have life insurance – AWESOME! You are doing the exact right thing for your family or future family. However, if you know someone who needs to hear about it, please share this with them. You never know what the future brings and you could be saving a family a tremendous amount of heartache by letting them know. Thanks for looking out 🙂

Be good to yourself, your friends, your love, and BE GOOD TO YOUR MONEY!

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11 replies
  1. Meg
    Meg says:

    What is the process of getting the surrender amount from a Cash Value Policy? Are you taxed or penalized in any way? I have a term policy and apparently misunderstood what my variable one was. I’d like to look into this. Thanks!

    Reply
    • Peach
      Peach says:

      Meg,

      It actually depends on whether or not there was growth on your Cash Value Policy. When you cash our or “surrender” your policy for the cash, the gain on your policy (if any) is subject to income tax. This is a great question – thank you for asking it 🙂

      Reply
  2. David - beaconlifefunds.com
    David - beaconlifefunds.com says:

    Term life insurance has a great benefit of the insurance which we are looking for. You are right, whole life insurance tends to be more expensive because of its investment value, however, if you are looking for a safe investment, why not? And it is tax free too right?

    Reply
    • Peach
      Peach says:

      Hi David!

      Thanks for the comment, but we are going to have to agree to disagree here. Here is why I think Whole Life Insurance is 100% Crap: Life insurance is there to take care of your family in an event of a premature death. Whole Life agents will sell you on the idea of “Well, look what else our plan can do for you via all these cool bells and whistles”, when in reality all of that extra garbage is just that….garbage. I don’t buy hot dogs at gas stations because I feel they should remain in the gas business. I also don’t buy investments through insurance companies because they should remain in the insurance business. Plus, I can always get better returns investing on my own or through a broker than I can after paying the ridiculous fees through the whole life policy. Lastly, YOU DON’T NEED life insurance for your whole life if you get out of debt, build wealth, and save. This is the point where you are self-insured. But, while you’re getting out of debt and building wealth, why not purchase 10x less expensive Term Life policy (vs Whole Life) for the next 20-30 years until you arrive. As far as the tax-free piece – I try to stay away from horrible financial products even if it offers a tax break. Thanks fo the comment and for letting me take part in this discussion with you. 🙂

      Reply
        • Peach
          Peach says:

          Hi Michael,

          I have a feeling that you sell insurance for a living, which is why you mention the tax savings. I am not mad at you at all – you believe in product and you also must sell the product to provide a living. I have heard all the tax savings crap over and over again, however insurance agents are always quick to point out the tax savings and forget to mention the ridiculous high fees and the depressingly low average returns. I’ll pay more in taxes all day long….and also pay about 1/10th of the premium for Term Life vs Whole Life and invest the other 90% savings in anything else besides Whole Life. Sorry Michael, but I think we are going to have to agree to disagree here.

          Reply
  3. Mike
    Mike says:

    You are leaving out some important points on the whole life (permanent) insurance. It is a type of “forced” savings, which allows for a loan or a withdraw against the interest and/or dividends paid to the policy owner. And most plans, at least from the reputable companies, will actually pay out the extra money earned. And while I agree to disagree with you also, as I do see the value in permanent life insurance, there are a couple keys to remember. 1) Death benefits are tax free as opposed to other accounts like this because the government wants your life to end with your debts getting paid. This puts money back into the economic flow. 2) It doesn’t matter what kind of plan you have, all that matters is when you die, there is one in place. That is the correct plan for you. The death benefit is paid out no matter what plan you have, if the death is not excluded by the contract. 3) The earlier either type of plan is bought, the cheaper it is per month. A whole life plan bought at age 3 can be $10 a month, and earn more per year for a 34 year old man than he pays in (I know this from 1st hand knowledge, as I earn more than $120 a year from my plan). 4) The term plans could and are very good plans. I encourage them often. I also encourage people to look at the entire option they have. A term plan in your example above may only cost $11 a month now, but when Jenny is older and is closer to death, she’s not getting a term or perm plan for that price, and instead has spent all that money with $0 return, which is less than the 1.1% you quote. And now her bill, even for term, is going to be 10 times more per month. And many places won’t give her a full 30 year term plan at that age. However, if she has a good insurance agent and plan, they will over a conversion in that term to help. 5) This is key…if every person in the USA had a life insurance plan in place at the time of their death, the entire country would be debt free in about 2 generations, based on most speculations.

    I agree to an extent, for the love of everything, get SOME kind of coverage now. Worry about the change when you can. But protect yourself. I just want to explain there is a major difference between the information you have supplied and the information I have. Yes, I am an insurance agent, and I love your site. I just want to give a 2nd opinion.

    Reply
    • Peach
      Peach says:

      Thanks Mike for the in-depth reply! However we are going to simply have to agree to disagree he, because you nor anyone else is going to change my opinion on whole life being garbage. The fees are high, the returns are lousy, and the only people pushing these awful policies are insurance agents – and I don’t blame you, you have to make a living also. The number one thing insurance agents hate to hear, is “buy term and invest the rest”. You’re 100% right, Jenny in the above example will have a tough time getting a 30 year term when she’s older, but if she never bought whole life garbage and invested the difference of the premium for whole life vs the premium for term, she would have accumulated wealth.
      I know you and I are not going to agree and that’s fine. What I’ve learned over the past few years is you are not going to change insurance agents mind about whole life. Period. Not to worry, about 70% of Life insurance policies that are sold are whole life. Chris Peach from Money Peach is not going to change the minds of enough people to affect the insurance industry. However, Kiplinger, CNN Money, Dave Ramsey, Suze Orman, David Bach, and all the other giants out there who say whole life is garbage might…

      Reply
  4. Charles from Groton MA
    Charles from Groton MA says:

    Great article, thanks for explaining the differences in life insurance plans. I am 26 and have not thought about this stuff at all, but it may be worth looking into. Is it possible to have multiple plans? Like, can I get a 30-year term now, and another 30-year term when I’m 36? By the time I am 56 (when the first plan expires) I may have children/family and I don’t want them to lose out if I die at 57. Thanks!

    Reply
    • Peach
      Peach says:

      Yes Charles, you can stack plans like that if you would like. However I think a much better plan is to focus on getting out of debt, saving money, and building well while you have term life insurance in place. Great question 🙂

      Reply

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