The purpose of life insurance is to keep your family financially alive if you die. A good amount of life insurance to have is 8.5 to 10 times your annual income. So if your annual income is $30,000, purchase around $250,000 to $300,000 worth of life insurance.
Term is the least expensive life insurance.
Problems with whole life insurance:
1. “You can borrow your cash value.”
a. If you need money, you can borrow your cash value at a low interest rate of 5% to 8%. The insurance company is charging you interest on your own money that you overpaid in premiums.
2. “Your policy will eventually be paid up.”
a. Most everyone loves the idea of a paid-up policy; at a point in time that means no more yearly premiums. In reality, a paid-up policy is created only by overpaying your premiums. The overpayment will eventually be used to pay your future premiums. Therefore, all paid-up policies are just prepaid policies.
3. “You’ll be earning interest.”
a. The interest you earn is added to your cash value. The cash value is the amount of premiums you have paid over a number of years (paid $1,000 in premiums for 20 years. Cash value = $20,000). You earn interest on the premiums you paid and the interest is added to your cash value. The cash value is then given to the insurance company when you die and your family gets the Death Benefit (face value).
4. “Your insurance policy is a tax shelter.”
a. “You can borrow money from your insurance company tax free.” You can borrow money anywhere tax free. There are no income taxes on borrowed money.
b. Insurance proceeds at the time of death are subject to estate taxes.
5. “If you buy life insurance when you’re young, it will cost less.”
a. Yes because you will pay greater total premiums over a longer period of time. For example, mortgage payments are less each month on a 30 year mortgage than a 15 year mortgage. The 30 year mortgage costs more over time due to interest.
Never buy life insurance on a child unless he/she is in a commercial on tv making money or some other form of income.
My source is Charles J. Givens book “More Wealth Without Risk.” Copyright 1988, 1991
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