Buying Life Insurance

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

back the loan, the company won’t bill you or harass you to repay it, but your heirs will suffer the cost by the decreased death benefit. The total loan plus all accrued interest will be deducted from the final death payment. If you cancel the policy at any time, the loan plus interest will be deducted from the cash value that has built up in the policy. Borrowing on newer policies can cost you as much as 10% interest; if the company is paying dividends of only 8%, you’re losing money when you take out the cash value. It would be more economical to buy the extra coverage with a low-cost term policy that you will keep for about 10-15 years. By then you won’t need as much coverage.

Another favorite sales pitch used with young applicants is: “Purchase a low-cost 10-year-payment vanishing premium policy. You can always borrow out the cash value later if you need it for retirement or college tuition.” What they don’t tell you is that this method usually doesn’t buy enough coverage. The fine print in a vanishing premium policy also carries a warning that if future dividends are not enough to cover the true cost of the insurance, additional payments may be required.

If you must buy a cash-value policy, universal life is cheaper than whole life and builds cash values sooner. Comparing premiums is not the best way to judge the true cost of a policy. The interest-adjusted index gives you a more accurate cost per $1,000. Ask your agent to give you the formula and explain the indexed-adjusted net costs. Most of what you pay in during the first year goes to cover the commissions for the agent, setup fees for the insurance company, administrative expenses and mortality charges. People also forget that the proposed illustration is just a projection of future earnings based on an interest rate that may or may not be realistic over the next 10 years. Nothing is guaranteed about those future dividends.

A good compromise suggested by some industry experts is to buy two policies. One should be a low-cost universal life policy for $50,000 or $100,000 that will last for a lifetime. The second should be a term insurance policy for $500,000 or $600,000 that will expire in 15-20 years. The major concern is to get the coverage you need at a rate you can afford. Compare and shop for the best rates.

When you are looking for an insurance company, don’t bypass smaller, lesser known companies. Many of them have better dividend records and lower expense charges than the industry giants because they have lower overhead costs.

TAKE CAUTION WHEN SWITCHING POLICIES
If you’re thinking of switching policies, talk to several companies and ask for comparable illustrations using the same interest rates and payment schedule. If you have had your current cash-value policy for more than five years, it probably isn’t a good idea to switch to a cheaper policy with better cash-value projections because those projections aren’t guaranteed. Changing

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