Which Is Better, Term or Whole Life Insurance?

Which Is Better, Term or Whole Life Insurance?

After you have determined the appropriate amount of life insurance, you must also determine which type is best for you, both in the short run and in the long run. This decision will have a huge impact on your financial well-being throughout your life. Term insurance (temporary insurance) has the lowest initial premium but the highest long-term cost because premiums increase over time and your beneficiaries are highly unlikely to ever collect any payout from it. Premium payment terms are very inflexible and you never receive any of your premiums back. Whole life insurance (permanent insurance) has the highest initial premium but the lowest long-term cost because premiums never increase, and your beneficiaries are guaranteed to receive a much higher payout than what you put into it, as long as the policy stays in force. Furthermore, whole life insurance provides living benefits to you because it builds liquid cash that you can access at any time for any purpose. In the long run, the cash available for you to spend while you are alive is highly likely to be worth much more than what you put into it. Since it builds accessible cash, whole life premium payments count towards your 20% savings goal. Thus, you can accomplish both protection and asset building objectives at once. The optimum solution would be to own some of each—a prudent amount of whole life insurance depending on how much you are currently allocating to savings, and the rest in term insurance up to your full human life value. Remember that the amount is initially more important than the type. If current cash flow...
Life Insurance

Life Insurance

Are you worth more dead than alive? How much is the right amount of life insurance? I have found that although most people realize the importance of life insurance, they do not give much thought to how much is the right amount for their situation. Most people also assume that they could purchase as much life insurance as they want. You may be surprised to learn that insurance companies actually will not allow you to be worth more dead than alive. No asset can be insured for more than its current economic value, whether it is a car, a house, or a human life. The amount of life insurance for which you can qualify is based on your current age, annual income, assets, and debts. This is called your “human life value,” and it represents the economic loss which those who are financially dependent upon you would suffer if you were to pass away, such as family members, business partners, or creditors. Similar calculations based on age and income are also used by the courts to determine appropriate wrongful death awards, and were used by the administrators of the September 11th Victim Compensation Fund to determine how much should be paid to the family members of those who had been killed in the terrorist attacks of September 11, 2001. Of course the economic loss is only a tiny sliver of the total loss suffered when a human life is lost. The value of a human spirit could never be fully replaced. Each person’s talents, love, experience, wisdom, example, creativity, future capacity to give, and service to society are irreplaceable. That...
Long Term Disability Insurance

Long Term Disability Insurance

What is your most valuable asset? Is it your house? Your 401(k)? Your savings account? For most people, although they may not realize it, their biggest asset by far is their ability to earn an income. If their earned income were to stop, their whole life would fall apart. If you make $250,000 per year and plan to work another 20 years, your ability to earn an income is worth at least $5,000,000. If your income goes up by only 3% per year, then you will have earned more than $6,700,000 total over 20 years. How does that compare to the value of your house, which many people think is their biggest asset? Let’s say your house is currently worth $500,000. That would equal only two years of your current income. If it appreciates by 3% over the next 20 years, then the value would grow to a little over $900,000, which is less than one-seventh of the total value of your earned income over that same time period. What are you doing now to protect your ability to earn an income? Could you afford to take a two-year vacation right now? If not, how would you cope if you could not work for two years or longer because of sickness or injury? The most practical and economic solution might be a long-term disability insurance policy, unless you already receive enough passive investment income to meet all of your obligations without working. Would you ever buy a house without insuring it? Most people would not, even though the chances of a total loss are extremely low, and the financial...
How Much Auto and Home Insurance Do I Really Need?

How Much Auto and Home Insurance Do I Really Need?

The Right Amounts of Insurance How can we know how much is the right amount for auto and home insurance? The short answer is as much as the insurance company is willing to give us, for the lowest possible cost. I want full replacement value for all of my most valuable assets. If my home burns to the ground, I want the insurance company to pay to rebuild the whole house, not just the kitchen. If they would not rebuild my house the way it was before the fire, what is the point of even having insurance? I also want to retain as much of the risk as I can afford to retain through high deductibles so my premiums will be as low as possible without sacrificing high coverage limits. Although everyone’s insurance needs are unique and should be reviewed by a competent advisor, here are some general guidelines: Auto Insurance Liability limits are the biggest priority. I normally recommend the highest available liability limits, which are typically $250,000/500,000/100,000, and the highest available deductible, which is usually $1,000. If your coverage is currently significantly lower than this, you may be surprised to discover how inexpensive dramatically increasing your coverage will be, especially when you simultaneously raise your deductibles. Homeowners Insurance Be sure your home is insured for full replacement cost, but no more. You should periodically ask your agent to complete an updated replacement cost estimate to determine whether your coverage needs to be adjusted. Keep in mind that your home may need to be insured for more than it is currently worth because replacement cost is not directly related...
Are You Over-Insured?

Are You Over-Insured?

Have you ever felt like you were over-insured? No one wants to waste money on unnecessary insurance premiums because every dollar wasted is a dollar that could have been invested or spent on something a lot more exciting than insurance. On the other hand, not having the right types or amounts of insurance can be very detrimental to wealth building and enjoyment of life. How can we find the proper balance? The key is to cover only the potentially catastrophic risks we cannot completely avoid. The following types of insurance cover risks in that category: Auto Insurance Homeowners Insurance Umbrella Liability Insurance Medical Insurance Long Term Disability Insurance Long Term Care Insurance Life Insurance These types of insurance are critical because uninsured losses we may experience in these areas have the potential to financially devastate us. For example, if we carried only the minimum required auto insurance liability limits and seriously injured or killed someone in a car accident, how would we pay for the vehicle damage, medical expenses, and income loss of the other driver, which could add up to hundreds of thousands, even millions of dollars? How could we pay medical bills for unexpected cancer treatments, surgeries, and long-term hospital confinement if we had no medical insurance? Many years ago I met a man in his fifties who had incurred hundreds of thousands of dollars in medical bills twenty years earlier because his wife had developed a serious illness at a time when they had no medical insurance. She eventually recovered physically, but he told me he does not think they will ever fully recover financially from...