A CPA Talks About Buying Life Insurance

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Not everyone needs insurance. The first thing to do is to make sure you need it. Life insurance is really meant for your family members or other dependents that rely on your income.
A CPA Talks About Buying Life Insurance

Why would you buy life insurance?

You buy life insurance so that, if you die, your dependents can live the same life they live now. Strictly speaking, then, is only a means of life insurance to replace your income in your absence. If you do not have dependents (say, because you are one) or you do not have an income (say, because you're retired), you do not need life insurance. Note that children rarely need insurance because they almost never have dependents and other people do not depend on their income.

Life insurance comes in two flavors

If you need life insurance, you should know that it comes in two basic flavors: term insurance and cash value (also called "lifetime" insurance). Nine - nine times out of 100, what you want is term insurance.

Term life is simple to buy and understand

Term life insurance is a simple, direct life insurance. You pay an annual premium, and if you die, a lump sum is paid to your heirs. Term life insurance gets its name because you buy insurance for certain terms, such as 5, 10 or 15 years (and sometimes longer). At the end of the term, you can renew your policy or get a different one. Great benefit insurance term is that it is cheap and simple.

The cash value is trickier

Other insurance flavor is cash value insurance. Many people are drawn to the cash value of the insurance because it should allow them to save some of their premiums paid over the years. After all, the reasoning goes, you pay for life insurance for 20, 30 or 40 years, so you might as well get some of the money back. With the cash value of the insurance, the premium part of the money saved in the account is yours to save or borrow against.

This sounds great. The only problem is that the cash value of insurance is usually not a very good investment, even if you hold the policy for years. And it is a terrible investment if you make a policy for only a year or two. What's more, to really analyze the insurance policy cash value, you need to perform highly sophisticated financial analysis. And this is, in fact, the main problem with cash value insurance.

While perhaps some kind of insurance policy cash value is available, many-perhaps most - terrible investment. And to know the good from the bad, you need a computer and the financial ability to do something called discounted cash flow analysis. If you think you need insurance cash value, it may make sense to have a financial planner who performs this analysis for you. Obviously, the financial planner should be a different person from the insurance agent selling the policy.

What was the point? The cash value of the insurance is far too complex financial product for most people to deal with. Note, too, that the investment options tax deductible - such as 401 (k), 401 (b), deductible IRA, SEP / IRA or Keogh plan - always a better investment than the investment policy cash value. For these two reasons, I strongly advise you to simplify your financial affairs and increase your net worth by sticking with an investment tax reduction.

If you decide to follow the advice and choose a term life insurance policy, make sure that your policy is canceled and non-renewable. You want a policy that cannot be canceled under any circumstances, including poor health. (You have no way of knowing what your health will be like ten years from now.) And you want to be able to renew the policy even if your health deteriorates. (You do not want to go through a medical review every time a term up and you need to renew.)