Before we get into any depth about life insurance, we need to ask the question Do I have it? If the answer is no that needs to change as soon as possible. The most common aspect of life insurance is the death benefit. It is what the policyholders’ named beneficiaries receive upon the policyholder’s death. The issue is many of us believe this is the only benefit of a life insurance policy. It is not. The death benefit of a policy is just a feature. It is not the sole reason to get a policy. The best approach to life insurance is to understand that the policy is for your life, not your death.
The best policies for yourself and your family are whole-life and index-universal life (IUL) policies. In addition to the death benefit we discussed, these policies have two major perks. They build cash value and provide protection from that cash value losing its value via loss protection as low of 0%. This cash value the policy builds can be borrowed against. The cool thing about this is the money building can be borrowed against for whatever the policyholder sees fit. These policies are stock market based, which performs at about a 10% increase per year. How does loss protection work? How can it be tied to the stock market yet have a loss risk of zero? Let’s say the market does great and has a 10% increase. The policy promises to pay you a 6% per year. This return sounds like a rip-off, correct? Next year, the stock market doesn’t perform and posts a 6% loss. What happens to our policy’s cash value? Nothing. It doesn’t go up, but more importantly, it doesn’t go down. Building a hefty cash value over years or decades is easier when not taking a loss throughout the years.
An additional perk is the idea of infinite banking. With IUL’s, after building cash value in these life insurance policies, we can borrow money from it at an interest rate less than what the policy is paying us. An example is borrowing $50,000 against your policy’s cash value at a 2% rate while the policy pays you 6%. The money borrowed doesn’t come out of our cash value. We borrow against our cash value, so our money still grows in full. We pay back the money over time. We are free to do it as much as we would like. What if something horrible happens financially and we can’t pay the money back. Do we lose our policy? No. Is the defaulted amount taken from our cash value? No. The amount we default is taken out of the death benefit. That is another perk of the death benefit of the policy. The death benefit protects you from financial mistakes you make in life. It is better than leaving financial issues to the beneficiaries to handle.
These policies are the best, but there are other policy types. Term life insurance is an affordable alternative if one wants to have a death benefit supplied to beneficiaries. We are covered for the term of the policy. (10, 20, or 30 years) We don’t build a cash value in most cases (Outside of Return of Premium policies). We cannot borrow from it because the policy’s only value is the death benefit. The benefit of these policies is the price. The best use of these policies is to protect our families from financial hardship in the event of unexpected death. The only benefit to the policyholder is peace of mind which can be priceless for individuals who aren’t financially blessed, but will be able to leave their beneficiaries better off than the position they were in while living.
In closing, life insurance is a necessity for all. It is irresponsible to be an adult without a policy. All readers of this blog are now responsible for educating themselves a little more on the best policy type for them. Whether it is a whole life/IUL policy that builds cash value to be used throughout life or a term policy to make sure our immediate family has funds to carry on for years without us. Whatever the case, it is better than the alternative of having nothing and attempting to collect whatever friends and family can muster upon our death. It is your choice, a large tax-free check delivered to your family in private or a public request on your behalf, asking for anything people can spare. It sounds like an easy choice.
Food for thought. You do the dishes!
