Types of Life Insurance
There are two broad types of life insuranceâ€”term and whole life. Whole life policies provide insurance for your entire life as well as a savings component, but they come with hefty commissionsâ€”up to 80 percent of your first-year premiumâ€”that are not worth it at all. There are plenty of savings plans other than an insurance policy that are a far smarter move. With that in mind, in my opinion, the only type of life insurance that makes sense is term, which is good for a specific period of time. The premium is based on your age, gender, health, the death benefit desired, and the term.
Here’s how to figure out how much insurance coverage you need:
- Determine the amount of money the survivors would need to maintain their standard of living if the insured person died. Let’s assume it’s $50,000 a year.
- Multiply that amount by 20. In this case, you want to purchase a $1,000,000 policy. Why multiply by 20? Interest rates are currently at about 5 percent, and if that death benefit is invested at that rate, it will get $50,000 annually in pretax income without touching the principal
I think you should have insurance in place until you’re at least 65. Assuming you save for your retirement, once you reach 65 you won’t need insurance because you’ll have sufficient income from your retirement accounts, pensions, and Social Security.
The younger you are when you purchase a policy, the lower your monthly premium. For example, a 35-year-old woman in good health might pay about $70 a month for a $1,000,000 level-term policy over 30 years. A healthy 45-year-old woman purchasing a $1,000,000 policy for 20 years could pay about $90 a month; the monthly premium for a 45-year-old man will be in the vicinity of $120.
Is Suze Orman Right about Life insurance?
Life insurance is an importantÂ subjectâ€”too important for bad advice. And thatâ€™s why Iâ€™m going to take a couple minutes to unpack Suze Ormanâ€™s unwise counsel.
(For those of you without televisions, Suze Orman is an incredibly popular personal finance pundit and Oprah protÃ©gÃ©.)
When answering the question, â€œHow much life insurance should I get?â€ Orman resorts to a long-discredited formula of multiplying your salary by 20.
The Insurance Information Institute (III) calls this formula â€œsimplisticâ€ because it ignores inflation and other sources of income. The III outlines a scenario in which, at 3 percent annual inflation, Ormanâ€™s formula would leave a survivor with no money after 16 years.
Ormanâ€™s conclusion on the whole life vs. term life insurance debate matches our own, but her reasoning is suspect. She discourages consumers from buying whole life insurance merely because insurance agents make large commissions on such policies.
â€œWhile I agree with her that whole life insurance is a poor choice, her explanation for why kind of leaves a person wondering who in the world ever told her she could touch a microphone,â€ says Ed Hinerman, a life insuranceÂ and blogger. â€œThe reason whole life is a bad deal is that it mixes your family protection with investments â€¦ commission is not the issue!â€
In other words, permanent life insurance is a bad investment strategy. While it will replace lost income in the event of the policyholderâ€™s death, it will never be a cash cow while the insured is alive. We at InsureMe generally subscribe to this advice: â€˜buy term and invest the difference.â€™
Whatâ€™s more, Hinerman notes that you should buy a financial product because itâ€™s the right product for you, not because it results in a large or small commission for the agent or broker. The commission is immaterial.
When it comes to life insurance, thereâ€™s no one-size-fits-all approach, despite what Orman would have you believe. The best way to find the right coverage is to talk to a licensed professional that you trust. He or she will look at your unique situationâ€”your age, income, assets, number of dependentsâ€”and help you find the best policy.