Great Savings Tip #78 – Buy Term Life Insurance

Tip 78 out of 100 for great ways to save.

There are all kinds of ways to save money.  For an amazing list to get started building a brighter future visit our Great Savings Tip page.


Meanwhile, if you’re looking at buying life insurance check around and get several quotes before you do anything.  Remember, that salesman gets a commission so make him earn it.  Now, here’s why term life beats whole life almost any day, plus 10 important things to consider when buying any life insurance.


Protecting The Family


Tip #78) Buy term life insurance. If you die, will your partner or loved ones have enough money on hand to pay off your debt, stay in the house, or replace your income?  If you’re young and single, then life insurance may not make sense, unless it’s to cover the costs of burial or other funeral expenses, which can easily range into the thousands (see our Tip #88 Cremation Versus Burial).  On the other hand, if you have a spouse or kids then the money from a life insurance policy can mean the difference between maintaining a lifestyle or potentially falling into poverty.  It’s something worth the time to think about.


Two Basic Types


There are two basic types of insurance (with all sorts of variations in between).  One common type is term life, which is pure insurance, meaning your payments or “premiums” only go toward the cost of the policy.  This means there’s no savings plan involved, but there is a promise to pay your “beneficiaries” a predetermined sum upon your death.  The other is whole life, which is part insurance and part savings (i.e. investment).  Now, because of the investment part, whole life usually allows you to borrow against the policy up to your accumulated cash value.  This can be handy in an extreme emergency, but financial experts agree it’s rarely a good idea.  In addition, any borrowing you do will ultimately reduce your final payout, which can easily result in thwarting the reason you bought insurance in the first place.  If this seems a bit confusing don’t worry.  Just make sure your agent gives you the complete rundown on the specifics of your policy and a chance to consider your options before signing on the dotted line.


More On Whole Versus Term


Are you prepared if something should happen?

What separates life and death?

Insurance agents push whole or whole life variations like universal life because they make much better commissions on the policies—as much as 80% of the first years premium may go toward commission.  The basic idea of a whole life plan is that the premium you pay covers both the insurance and a slowly building “cash value” which is generated by an investment.  The cash portion accrues interest or dividends based on some formula the insurance company derives, or from the type of investment(s) tied to the policy.  However, there are often far better ways you can invest the same amount of money you throw at a whole life policy.  Bottom line: Don’t buy whole life or it’s closely related cousins.  Buy term life instead.


For Your Consideration


Here are 10 important things to consider when buying a life insurance policy:


(1) Term life policies are far less expensive than whole life polices—as much as 5 times less!


(2) The younger and healthier you are when you buy into a policy the lower your premiums will be.  In other words, if insurance is in your future don’t put buying off.


(3) Though you save money buying younger, only buy when it makes sense for your particular situation.  For example, if you know your family has a long history of heart disease buy long before you’re ever going to need to worry about it.  Also, if your kids are grown and have their own income you need to ask whether it still makes sense to cover them under your plan.  Or maybe you’re out of work and don’t have kids or other serious obligations.  If  this describes your current situation, then why shell out money every year until things change for you?  There really is no one size fits all solution.


(4)  Buy enough insurance to fulfill your needs without breaking your budget.  You’ll want to think about replacing some or all of your income, paying off debts, living arrangements for your surviving family members, education of your kids, etc. Though there are no set rules on this, many experts recommend buying a policy with a face value of 5 to 10 times your salary.  If you make $50,000 per year, that would mean a $250,000 to $500,000 policy.  However, everyone’s situation is different so don’t let anyone shame you into buying more than you need.  Remember, those same loved ones who’ll need some initial help when you pass on, may not need it down the road.  Kids grow up and get jobs, right?


(5) Never lie on an insurance application.  This is important as it can come back to bite you.  Chances are the company will investigate suspicious circumstances before paying so it’s not worth the risk to lie.


(6) Shop around.  You can find hundreds of websites offering insurance who will give you a quote without obligation.  Take advantage and get as least 4 or 5 quotes before buying.


(7) Be prepared to answer a questionnaire about your activities when you’re in the market to buy.  It should hardly come as a shock that insurance companies make money analyzing risks to reduce the amount of money paid out so some activities are frowned on—activities like smoking, drinking, skydiving, etc.  Be prepared to pay more or even be rejected by some companies if you’re all about “bad” habits and thrill seeking.


(8) Be prepared to take a physical.  Though this won’t be true in all cases, many policies require a physical.  If a physical is necessary it should be paid for by the company.  Some companies will also choose the  doctor or nurse doing the physical, which usually involves taking a blood sample, checking your heart rate and pulse, listening to your lungs, etc.


(9) Keep your savings and investments separate from insurance.  This means skip whole life and its cousins and put the money you save into separate investments like stocks, bonds, annuities, etc.  Plus, if you are worried about taxes consider an IRA or put the money in your 401K (See Great Savings Tip #76 on 401Ks).


(10) If you don’t qualify for life insurance due to a health problem or otherwise, check to see if your employer offers a group life plan or whether any association you belong to offers one (for example, AARP offers group rates for those over 50).  Group rates can often be less expensive than individual rates, especially if you’re older or fall into a high risk classification.


One final note: If you already have a whole life policy and are considering replacing it with a term policy get the new policy first and make sure it’s in force before you cancel the other one.


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Do you get suckered into buying things you don’t need?  Check out:

4 Simple Steps To Limit Unconscious Spending



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