How To Pick The Right Life Insurance

Term or whole life insurance? Find out which one is best for you!

If you type “life insurance” in Google, you will get bombarded by advertisements touting their best life insurance product.  With so many different varieties, which one is best suited for you?  Do you even need life insurance?  If you have people who depend on you, the answer is YES!

You may not want to think about you or a family member dying right now, but you need to.  If you don’t plan for the worst, it can devastate the surviving family members if the unthinkable happens.  Aside from the grief of losing a family member, the survivors must quickly figure out how to replace the income that the passing family member provided.  This goes for stay at home parents as well.  If the homemaker passes, the main income provider must now arrange childcare and other services that the homemaker provided for free.  Stay at home parents are worth their weight in gold when you see how much childcare and other child rearing services cost.

Does Everyone Need Life Insurance?

No, everyone does not need life insurance.  There are several circumstances when it would not make sense for you to be paying for life insurance.  As stated before, life insurance is to take care of those who are left behind.

When Would You No Longer Need Life Insurance?

  1. Your kids are grown and you do not have a mortgage or other debts that they would be required to repay if you passed.
  2. You have paid everything off and have a substantial retirement that would take care of your spouse if you suddenly passed.
  3. In general, if those who depend on you can still maintain their quality of life without you.

When Would You Need Life Insurance?

  1. If those who depend on you could not maintain their quality of life without you and/or the income you provide.

Choosing The Right Insurance – And Cashing Out That Whole Life Policy You Have Had For Years!

There are many different types of life insurance policies, but for simplicity sake, they all fall under two main categories – term and whole life insurance.

Term life insurance is rather simple to understand.  You pay an insurance company to insure you for a certain dollar amount for a limited amount of time.  This type of insurance is considerably cheaper than whole life insurance because when the policy expires, the coverage ends.

Whole life insurance usually covers you for your entire life and some have a cash out option if you cancel the policy and/or you can borrow from it.  These policies are considerably more expensive than term life because they do not expire if you keep paying the premiums.  These policies are frequently pushed as being a great investment vehicle and a preferred tax sheltered option.  Whole life policies are usually the policy of choice sold by life insurance brokers – because they receive the highest commissions from these policies.

What Policy Did I Choose?

ask blackboard chalk board chalkboard
Question of the day

To make it a bit more personal, let me give you my scenario.  I am 35 years old with a stay at home wife and 3 kids.  My youngest is 5 years old and I am 2 years away from paying off my mortgage.  I am eligible to receive a pension in 6 years and if I die after receiving my pension, my wife receives 80% of my full pension amount until she passes.  In my scenario, I chose to pay for the term life max amount offered by my employer (which is usually cheaper than buying it outside of your employer) and then I went outside of my employer and bought a second term life policy to supplement my employer sponsored one.  The term life I bought is a 20 year policy which kept my rates down.  I bought the policy last year which means I will be 54 years old when the policy expires.

Why did I make this choice?  When I am 54 years old, I will be in a financially secure place and I may be retired as well.  I will have no major bills, our house will be paid off, and I will have a substantial retirement account and pension available to me.  If I pass, only my wife will need to be taken care of and my pension and retirement account will be able to maintain her current lifestyle.

Why not whole life insurance?  I did have a whole life insurance policy until a couple of years ago.  My parents opened the policy when I was a baby and continued to pay on it into my 30’s.  After 30 years of paying for this policy, the cash out amount was a little over $2,000…that’s it.  Whole life policies are expensive and are being pushed as an investment vehicle that is tax sheltered.  The truth is, if you want to invest, it would make more sense to invest that money in a Roth IRA and shelter it from taxes that way.  You would make much more on your own than you would make on that whole life policy – which is designed to make the broker money…. not you.

Whole life policies are a bad investment and not designed with the policy holder in mind – they are a profit machine for the insurance company.  The insurance company invests your monthly premiums, and profits off the investment while returning only a fraction of the profits to you.  I honestly can not think of a situation where a whole life policy would make more sense than a term life policy… if you can think of one, please let me know.

How Much Insurance Do I Need?

black and grey casio scientific calculator showing formula
The right calculations…

The majority of financial experts agree that you should have a minimum of 10 times your annual salary in life insurance.  For my combined term life insurance that is 10 times my annual salary, I pay about $50 a month.  To get that same coverage in a whole life policy that also has a cash value, I would pay about $537.35 a month based on a recent quote I just got from topwholelife.com.  I am saving myself $487.35 a month which adds up to $5,848.20 a year, or $116,964.00, over that 20 year period I need insurance.  Had I invested that $5,848.20 each year for 20 years in an investment that averaged an 8% return – an average stock market return, it would have grown to $289,035.13.

What about that cash value from the whole life policy?  After 20 years it would have been worth $153,992.00.  By giving your money to the insurance company, they made $135,043.13 off of you.  That was very generous of you to pay for their yachts..

By going with my term life, I spent $12,000 over 20 years for the same coverage and made an extra $289,035.13 over the span of 20 years… it’s math my friends, math the brokers hope you don’t do.

Don’t fall for the lie that life insurance is a good investment vehicle.  Life insurance should be separate from your investment strategy – not part of it.

I encourage you to look at your current situation and decide if you need life insurance.  Most people need it but they are not appropriately covered.  $100,000 is not going to go very far if you have people who will rely on you for the next 20 years.  Look into term life insurance that is 10 times your annual salary – it is much cheaper than you would think and it will give both you and your family peace of mind if the unthinkable happens.

I shopped around and used Zander Insurance to get my term life policy – a company endorsed by Dave Ramsey.  I found Zander was able to get me the best rates with a reputable company.  Check them out if you’re in the market at Zander Insurance.


Don’t let life insurance brokers push you around or sell you garbage whole life policies.  Do your research and what is best for your family. Use your money to buy yourself a yacht, not the broker!  If you have not signed up for my email updates, please click the subscribe box below.  If this article was beneficial to you, please share it across social media and as always, if you have a comment please jot it down below.  I would love to hear from you.  Stay safe my friends, keep working at this money game – you work too hard to be this broke!

-Ryan

Advertisements

Author: Ryan

Hi!  My name is Ryan and I have a passion for personal finance and education.  I am married and have three children, a girl and two boys all under the age of ten.  My wife stays home with the kids so it can be challenging to live off one income.  Much of what I write is based off my personal experiences and what I have learned in the course of my life. My financial journey began when my wife and I saved up a sum of money and I didn't know who I could trust to invest it.  After several interviews with financial advisers, I still didn't feel like I could trust anyone.  That began my journey to educate myself by reading every finance book I could get my hand on and by attending financial seminars.  After getting a good handle on debt, finance, and investments, I decided to start this blog as a resource for others who find it difficult to trust people with their money. I recently started writing this blog about how to get out of debt and start investing to create the future you deserve. I have been in law enforcement for 14 years and I have seen the devastation left behind by people who mismanage their finances.  I started this blog because I want to help as many people I can by educating them on common sense money management. As far as my formal education, I obtained a Bachelor of Science in Education and a Master of Administration Degree from Northern Arizona University.  I am an adjunct professor at a local community college and I have been a student of finance for many years. This blog is dedicated to those looking to eliminate their debt and to mold a new way of thinking, living, and spending. Education, focused on financial stability and wealth, is the main purpose of this blog. This website is a new journey for me and I know there are areas that I could improve.  Please feel free to reach out to me with any critiques - I would love the feedback so I can be as effective as I possibly can and provide the most relevant information.  I look forward to writing for you and learning with you! If you have any questions or comments, I would love to hear from you! -Ryan

2 thoughts on “How To Pick The Right Life Insurance”

  1. I learned a lot from this post. I’ve had someone try to talk me into whole life insurance but I usually don’t do what people tell me haha. I have term life insurance that is 5x my current salary. Rachel’s is barely 2x her salary. I just life insurance shamed her with this article haha. Thanks as always for sharing your knowledge.

    Liked by 1 person

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.