Buying Life Insurance

Choosing the right policy can protect and preserve your assets for your kids without costing their inheritance

you must renew the policy each year. When purchasing term life with level-premium payments, you make a commitment to the insurance company to keep the policy for a specified number of years, which allows the premiums to be averaged out over that period of time. This means that you will pay the same premium at age 45 as you did at age 25, even though you have become a greater risk.

Realize that opting for the level-payment premiums will cost you more annually in the early years to keep the premium unchanged as you age. The anticipated cost of a $100,000 policy for a 35-year-old male nonsmoker would look like this:

  Term Life Whole Life Universal Life
Annual 146 862 $664 premium
Cash value after 5 years None 5550 7498
Assuming 8% dividends

A 35-year-old woman can buy $250,000 of 15-year level term for $230 a year. The same policy for a 35-year-old man would cost $293 a year.
Buy as much term insurance as you can afford. Term policies are often overlooked and underrated, and most insurance agents will not tell you about them because the agents do not earn a large commission on these low-cost policies. The concept of “buy term and invest the difference”– the difference between what you would pay for term and what you would pay for whole life–popularized in the ’80s is still a feasible idea (see the Whole Life vs. Term Life table).

THE ARGUMENT FOR CASH VALUE
Many people buy cash-value insurance because they consider it an investment. Life insurance companies are the largest financial institutions in the world, with nearly $2 trillion in assets in government securities, long-term mortgages (usually for office buildings, shopping centers, apartment complexes) and some corporate bonds. Maybe even junk bonds. If you purchase a participating policy, you get a s
hare of the income from these investments in the form of dividends. If you get a non-participating policy, you receive what is called “excess interest,” but there is no legal contract that says the company has to pass it on to you. The only “guaranteed” rate of return on your cash value in a non-participating policy is the 4% required by law, which is what you would earn from an account in most savings banks.

When you buy whole-life or cash value insurance, you pay the highest premiums for coverage. Most of what you pay in the first year goes into the agent’s pocket as a commission plus administrative charges and front- end expenses levied by the company. Whatever is left over, which is usually nothing until after the second year, is invested.

An agent will tell you that one reason to buy a cash-value policy is that you can borrow from your policy for retirement or for college tuition. The insurance company will allow you to once you have made enough payments, although it may take up to six weeks to receive the funds after you’ve requested them; also, the company will charge you interest on the money you borrow, which seems outrageous since it’s your money. If you do not pay

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