Tips From A CPA Talking About Buying Life Insurance - Ratinah

Life Insurance - Want to talk face-to-face about what type of life insurance you should buy--and how much life insurance you should buy? Bestselling author & CPA Stephen L. Nelson shares some tips.

Tips From A CPA Talking About Buying Life Insurance - Ratinah

Not everyone needs life insurance. The first thing to do is make sure you need it. Life insurance is intended for your family members or other dependents who rely on your income.

Why You Should Buy Life Insurance?

You buy life insurance so that, if you die, your dependents can live the same life they are living now. In fact, life insurance is simply a means to replace your income in your absence. If you have no dependents (for example, because you are single) or you have no income (for example, because you are retired), you do not need life insurance. Note that children rarely need life insurance because they almost never have dependents and other people are not dependent on their income.

Life Insurance Comes in Two Flavors

If you do need life insurance, you should know that it comes in two basic flavors: term insurance and cash value insurance (also called "whole life" insurance). Ninety-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 and straightforward life insurance. You pay an annual premium, and if you die, a sum of money is paid to your heirs. Term 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 validity period, you can renew your policy or get another policy. The great benefit of term insurance is that it is cheap and simple.

Cash Value More Complicated

Another flavor of life insurance is cash value insurance. Many people are attracted to cash value insurance because it is said to allow them to keep a portion of the premium they paid over the years. After all, the reason is, you're paying for life insurance for 20, 30, or 40 years, so you'd better get some of that money back. With cash value insurance, a portion of the premium is deposited in your own account to be deposited or borrowed.

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

While there may be some insurance policies with good cash values, many—perhaps most—are bad investments. And to distinguish the good from the bad, you need the computer and financial skills to do something called discounted cash flow analysis. If you think you need cash value insurance, it might make sense for a financial planner to do this analysis for you. Obviously, this financial planner has to be a different person from the insurance agent who sold you the policy.

What's the point? Cash value insurance is a financial product that is too complex for most people to deal with. Note, too, that any tax-deductible investment option—such as a 401(k), 401(b), deductible IRA, SEP/IRA, or Keogh plan—is always a better investment than the investment portion of a cash value policy. . For these two reasons, I strongly encourage you to simplify your financial affairs and increase your net worth by sticking to tax-deductible investments.

If you decide to follow my advice and opt for a term life insurance policy, make sure your policy is non-cancellable and renewable. You want a policy that cannot be canceled under any circumstances, including ill 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 don't want to go through a medical review every time the timeframe runs out and you need to renew it.)

That's Tips From A CPA Talking About Buying Life Insurance


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