A 'Fee-Only' Financial Planner's View of Life Insurance
When was the last time you met someone who introduced themselves as a "life insurance agent?lesman will provide? in fact , they're going to recommend you purchase life assurance . to form matters worse, the insurance industry has managed to require something quite simple and complicate it to the purpose where not even all the people that sell it fully grasp the implications of the merchandise .
So what do Certified Financial Planners (CFPs) who don't collect commissions on product sales believe life assurance ? When is purchasing life insurance appropriate?
CASH VALUE vs. insurance
Life insurance comes in many forms. Some policies slowly accumulate a cash value, meaning most of your premium goes towards insurance and alittle portion goes towards a bank account . once you surrender your policy you'll be ready to collect this bank account .
These policies are commonly presented as an investment. But beware! you ought to always consider life assurance as an expense. once you purchase insurance, you're buying something --peace of mind. Insurance may be a thanks to make sure the financial security of the breadwinner's family until the family can accumulate enough investments to form insurance not necessary. For this reason, insurance is usually a necessity for young families, and sometimes less necessary for mature families.
Whole Life
Whole life assurance typically requires the owner to pay premiums for the lifetime of the policy. The insurer guarantees that the policy's cash values will increase no matter the performance of the corporate or its experience with death claims. With whole life policies, the rate of interest applied to the cash value is predetermined and glued .
Universal Life
Like all kinds of insurance, universal life pays a benefit when the insured individual passes. Before death, however, the cash-value grows at varying rates counting on the ups and downs of interest paid on bonds and savings accounts.
Variable-Universal Life
Variable-universal life policies are almost like universal life policies, except the cash value are often invested in mutual funds (called sub-accounts) instead of at the insurance company's current interest rates. However, the fees on these policies are often extremely high and in almost every circumstance there are more efficient strategies.
Term
Policies with 100% insurance and no cash values are called insurance . this is often the sort of policy most of the people picture once they consider insurance. you merely pay the premium and collect a benefit within the event of death.
Although there's no savings element to insurance , remember you're buying insurance to make sure your family is taken care of if something happens to you. In most cases there are more efficient ways to save lots of and plan for retirement than through the acquisition of money value insurance policies.
Insurance or Investment?
A phrase you'll have heard when considering insurance is to "buy term and invest the difference." (You likely don't hear this from insurance agents because they're paid a better commission on cash-value policies. The salesman's commission on cash value policies is usually 90% of your first year premium.) To implement this strategy, buy low-premium insurance from a highly-rated insurer and put the cash saved from not buying a cash-value policy into a real investment account like an IRA, Roth IRA, etc. This provides your family with the protection it needs and an efficient thanks to but retirement. Hopefully, over time, the investment account will grow and therefore the need for insurance are going to be eliminated.
Most fee-only financial planners are proponents of the "buy term and invest the difference" strategy. However, there are certain occasions when a cash value policy may add up . as an example , buying a cash value policy could also be appropriate if your need is permanent, like caring for a special needs child. Additionally, cash value policies may add up if your need is for certain , like if you've got the policy and are then diagnosed with a terminable disease. However, if you would like a cash value policy, search for a no-load policy that does not pay the salesperson a commission. this will cut your premium in half and you will not pay penalties once you withdraw your cash value.
Canceling a Policy: Prepare to Pay
Canceling a term policy is straightforward - just stop paying the premium. If you cancel a cash value policy within 10 years of purchase, you'll generally pay a penalty (called a surrender charge) once you withdraw your cash value. If you cancel a variable universal life policy, you'll also pay ordinary income taxes on the profits inside the policy. likelihood is that your insurance broker forgot to say this.
Bottom Line
Insurance is clearly a sophisticated product, except for many, it's a necessity. However, remember that insurance agents are financially motivated to sell you insurance, no matter your circumstances. Always speak to a fee-only Certified Financial Planner, who isn't compensated supported the merchandise recommended, to urge an objective opinion of whether you and your family have adequate coverage .
