A CPA Talks About Buying Life Insurance
Not everyone needs life insurance. The first thing you need to do is make sure you need it. Life insurance is actually intended for your family members or other dependents who depend on your income.
Why take out life insurance
You buy life insurance so that if you die, your dependents can live the same life they are living now. In reality, life insurance is just a way to supplement your income in your absence. If you have no dependents (for example because you are single) or if you have no income (for example because you are retired), you do not need life insurance. Keep in mind that children rarely need life insurance because they almost never have dependents and no one else depends on their income.
Life insurance comes in two versions
If you need life insurance, know that it comes in two basic forms: term insurance and cash value insurance (also called “whole life” insurance). Ninety-nine times out of 100 what you want is term insurance.
Life insurance is easy to buy and understand
Term life insurance is simple and easy life insurance. You pay an annual premium and, if you die, a lump sum is paid to your beneficiaries. Life insurance gets its name because you buy insurance for a specific period of time, such as 5, 10, or 15 years (and sometimes longer). At the end of the period, you can renew the contract or rent another contract. The big advantage of term insurance is that it is simple and economical.
Cash value is more complicated
Another type of life insurance is cash value insurance. Many people are attracted to cash value insurance because it allows them to keep a portion of the premiums they pay over the years. After all, the way I see it, you're paying for life insurance for 20, 30, or 40 years, so you might as well get some of that money back. With cash value insurance, a portion of your premium is deposited into an account that you must save or borrow against.
It looks good. The only problem is that cash value insurance is generally not a good investment, even if you keep the policy for many years. And it's a bad investment if you only hold the contract for a year or two. Additionally, to truly analyze a cash value insurance policy, you must perform very sophisticated financial analysis. In fact, this is the main problem with cash value life insurance.
While there may be some insurance policies that offer good cash value, most may be a poor investment. And to differentiate between the good and the bad, you need a computer and the financial skills to do what's called a discounted cash flow analysis. If you think you need cash value insurance, ask a financial planner to do this analysis for you. Of course, the financial planner must be someone other than the insurance agent who sold you the contract.
What's the point? Cash value insurance is a financial product that is too complex for most people to manage. Also remember that any tax-deductible investment option, such as a 401(k), 401(b), tax-deductible IRA, SEP/IRA, or Keogh plan, is always a better investment than the investment portion. monetary value policy. For these two reasons, I highly recommend that you simplify your financial affairs and increase your net worth by making tax-deductible investments.
If you decide to follow my advice and choose a life insurance contract, make sure your contract is non-cancelable and renewable. You want a policy that cannot be canceled for any reason, including illness. (You don't know what your health will be like in ten years). And you want to be able to renew your contract even if your health worsens. (You don't want to go to the doctor every time it expires and you have to renew it.)
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