by Damon Carr, For New Pittsburgh Courier
I recently did a financial coaching session with a single female with no children. She had come across a windfall of money. She was looking to learn how to best invest this money for retirement. As I was doing a cash-flow analysis, I noticed she had life insurance. This whole life insurance policy had a face amount of $50,000 and a cash value of approximately $5,000.
I explained to her that given the fact no one is depending on her income, and being that she’s not trying to leave legacy money to family, friends, pets or charity, her need for life insurance is solely for burial expenses. I suggested that she could get a term life insurance policy at a fraction of the cost then liquidate the $5,000 cash value to add it to her retirement savings. I assured her that she’ll get a much greater return on investment by doing this.
She loved the idea of accessing the $5,000 cash value but didn’t like the fact that term life insurance had a definite timeline whereas whole life insurance was permanent. She stated that with term insurance, she can pay on it for years and in the end never get any money back. I told her insurance is the only financial product we buy and hope we never need. I explained to her that we pay for car insurance, homeowners insurance and other types of insurance and never file a claim. What’s the difference? I then dropped the DIME on life insurance. I also shared the DIME strategy regarding life insurance to my Facebook audience. Below is some of our conversation:
Life insurance is to replace the income or economic value of a person who has people depending on them.
When it comes to life insurance a simple way to determine how much insurance is needed is to employ the DIME strategy. How much is needed? A dime or 10 percent of your gross annual income. What should you use insurance proceeds for? D.I.M.E ~ Debt payoff! Income replacement! Mortgage payoff! Education cost for the kiddos!
I believe whole life is the best way! Whole life provides investment for me and protection for my family.
The fact that you have life insurance shows you’re proactive and responsible.
The downside about whole life policies are: They’re extremely expensive, laced with fees, and have a poor rate of return in comparison to comparative saving and investment products. The reason is simple. You have to pay insurance fees plus pay the fees for the investment product they use to earn you money. Then pay more fees including mortality fees, surrender charges just to name a few. It’s better to get term insurance with an insurance company and do your saving and investing on the cheap with a financial company specializing in saving and investing.
Because of the high cost of whole life insurance, people who have it tend to be under insured. I’m a proponent of 20-year and 30-year term life insurance. The monthly savings on premiums can be used to beef up your savings and investing. Cheaper premium, more coverage, better rate of return on saving and investing = Win, Win, Win for you!
Damon, you’re correct. The only downside to term is they expire. I have 2 terms: a 20-year and a 30-year and a whole life policy. The term insurance will be expiring soon. My kids are also getting older. I got them when I was younger so the premiums are not as bad including the whole life. I think diversifying helps as well.
You can renew, update your policies or simply take out another policy. You’re still young and look relatively healthy. Take out another 20-year or 30-year term policy.
As you know the cost of term insurance is about 15 percent of the cost of whole Life. Get the term. Save the difference on your own. Over 20–30 years of saving, you, in effect, become self-insured.
That’s exactly how whole life insurance works. They’re, in effect, making you become self-insured within the policy. Say you have a whole life policy with a face amount of $100,000 and cash value of $30,000. If you die, how much do you think your designated beneficiary will receive? $130,000: Face amount plus cash value of $30,000 or $100,000 face amount? Most people think they’ll get $130,000 – face amount + cash value. They’re wrong!
Designated beneficiaries will get $100,000. The $30,000 reduces the amount that the insurance company has to shell out. They refer to it as net amount at risk. They’re on the hook for $70,000. If the cash value reaches $100,000, beneficiaries will only receive the $100,000 cash value. They’re forcing you to self-insure. Let’s say you take out a loan against your cash value or withdraw money from it, the insurance company reduces the face amount by the dollar amount borrowed or withdrawn.
With a term policy, you get full face amount plus the amount you saved outside of the insurance policy.
Damon, you forgot to mention that whole life policies do not pay real/actual “dividends.” If you notice, they parade them as additional income from investments in the policy. But those dividends are not taxable as income at the end of the year. WHY?
Because they are not dividends. They are “Over Drafts” and “Over Charges” and only reimbursements are made available, after the company makes money on the client’s money.
If the client needs a loan from the policy, regardless of credit reports, they have to pay the loan back, plus 6-8 percent interest. If you choose not to pay yourself back, the loan amount is subtracted from the face value of the policy, reducing the family benefit.
Whole life policies are chiefly designed to extract money from the client solely for the insurance company’s benefit and enrichment. It’s a disenfranchising product. Then there’s the perpetual commissions given to the insurance agent from the client’s policy.
~ Pastor Peter Joseph
Excellent points made by pastor. He’s right. Whole life insurance is pushed mainly because it pays a whole lot more in commissions than term insurance.
(Damon Carr, Money Coach can be reached at 412-216-1013 or visit his website at www.damonmoneycoach.com)