Do you need a life insurance?
December 13th, 2009
The primary purpose of life insurance is to protect against the loss of income caused by the premature death the person who earns the income that supports dependents. If you do not have dependents, you probably do not need life insurance. Life insurance provides the “instant portfolio” that the bread winner did not have time to build due to his or her premature death.
Level premium term insurance that fits the time period needed to build the portfolio or estate is the best fit for this need. Twenty year level term purchased after the birth of a child is often a good fit for a young family starting out in life.
Most people should not be purchasing cash value life insurance unless they have special estate planning or business needs. Cash value life insurance is very expensive compared to level term and often causes young families to be underinsured. It’s illegal to sell life insurance as a retirement vehicle or savings plan. Because of the high expenses and commissions to the agent, it’s usually a terrible investment.
Most people should not be putting money into cash value life insurance until they are maximizing their contributions to the Qualified Retirement Plans (e.g., 401k, 403b) and IRAs and are in a very high tax bracket. Premiums paid into cash value life insurance are not tax deductible. Investment money in cash value life insurance is not protected from creditors by ERISA.
What to do?
- Call your insurance company and ask for the “cost basis” of your cash value policies. Cost basis is the total amount of after-tax money that you have paid into the policy and which you can pull out without having to pay any taxes.
- If the cost basis is significantly more or less than the surrender value, consider the benefits of doing a 1035 tax free exchange into a Vanguard variable annuity.
- Purchase low cost term insurance that will provide a lump sum large enough to replace lost income for the period of time needed by dependents.
Low cost term insurance can be purchased online at www.insure.com or www.vanguard.com or www.tiaa-cref.com.
March 15th, 2010 at 4:27 am
Thank you for the sensible critique. Me and my neighbour were just preparing to do some research about this. I am very happy to see such great information being shared freely out there.
March 15th, 2010 at 8:19 am
When I retired, I chose a lump-sum from my company’s pension plan and rolled the money into an IRA instead of taking an annuity. I did this because it’s my understanding that if my wife and I were to die after receiving just a couple of months of annuity payments, none of the annuity’s value would be passed on to our children or other heirs.