A CPA Talks About Buying Life Insurance

Not everyone needs life insurance. The first thing to do is make certain you need it. Life insurance is really meant for your household members or other dependants who trust
on your earnings.

Why You Buy Life Insurance

You purchase life insurance so that, if you die, your dependants can dwell the same sort of
life they dwell now. Strictly speaking, then, life insurance is only a agency of replacing
your earnings in your absence. If you don’t have got got dependants (say, because you’re
single) or you don’t have earnings (say, because you’re retired), you don’t need life
insurance. Note that children rarely need life insurance because they almost never
have got dependants and other people don’t trust on their earnings.

Life Insurance Comes in Two Flavors

If you make need life insurance, you should cognize that it come ups in two basic flavors:
term insurance and cash-value insurance (also called “whole life” insurance). Ninety-nine times out of 100, what you desire is term insurance.

Term Life is Simple to Buy and Understand

Term life insurance is simple, straightforward life insurance. You pay an annual
premium, and if you die, a lump sum of money is paid to your beneficiaries. Term life
insurance gets its name because you purchase the insurance for a specific term, such as as
5, 10, or 15 old age (and sometimes longer). At the end of the term, you can regenerate
your policy or get a different one. The large benefits of term insurance are that it’s
cheap and it’s simple.

Cash Value is Trickier

The other spirit of life insurance is cash-value insurance. Many people are attracted
to cash-value insurance because it supposedly allows them maintain some of the
insurance premiums they pay over the years. After all, the logical thinking goes, you pay for life
insurance for 20, 30, or 40 years, so you might as well get some of the money back.

With cash-value insurance, some of the insurance premium money is kept in an account that
is yours to maintain or borrow against. This sounds great. The lone problem is that
cash-value insurance usually isn’t somes very good investment, even if you throw the
policy for old age and years. And it’s A awful investing if you maintain the policy for
lone a twelvemonth or two. What’s more, to really analyse a cash-value insurance policy, you
need to execute a very sophisticated financial analysis. And this is, in fact, the
major problem with cash-value life insurance.

While perhaps a smattering of good cash-value insurance policies are available, many—
perhaps most—are awful investments. And to state the good from the bad, you
need a computing machine and the financial accomplishments to execute something called discounted
cash-flow analysis. If you make believe you need cash-value insurance, it probably
do sense to have got a financial contriver execute this analysis for you. Obviously,
this financial contriver should be a different individual from the insurance agent merchandising
you the policy.

What’s the underside line? Cash-value insurance is much too complex a financial
merchandise for most people to deal with. Note, too, that any investing option that’s
tax-deductible—such arsenic a 401(k), a 401(b), a deductible IRA, a SEP/IRA, Oregon a Keogh
plan—is always a better investing than the investing part of a cash-value
policy. For these two reasons, I strongly encourage you to simplify your financial
personal business and addition your nett worth by sticking with tax-deductible investments.

If you make make up one's mind to follow my advice and take a term life insurance policy, be certain
that your policy is non-cancelable and renewable. You desire a policy that cannot be
canceled under any circumstances, including poor health. (You have got no manner of
knowing what your wellness will be like 10 old age from now.) And you desire to be able
to regenerate the policy even if your wellness deteriorates. (You don’t desire to travel through a
medical reappraisal each clip a term is up and you need to renew.)