At a young age, choosing the wrong type of Life Insurance could inadvertently jeopardize early retirement opportunities, create barriers to building actual wealth and experiencing financial independence. Although it does not seem dangerous in the beginning, it feels like a responsible decision. However, many years later, it can compress your financial capabilities to the point that there are no simple options for escape.
Instead of viewing this topic as a boring financial lecture, think of it as if you were descending down a trash chute. You assumed you had made a good decision. It had worked out for you; you were able to step away from the madness. As you descend further down into the garbage chute, though, the walls start to close around you. This is exactly how Permanent life insurance impacts the finances of millions of people. You come into it with good intentions, but by the time you realize what is happening, the financial compaction is in its last phases.
Life insurance is not a complicated product. It is simply a monthly payment, and should you die after you purchase this policy while it is still active, your family or assigned beneficiary will receive a lump sum payment (death benefit) from the insurance company. Essentially, Life Insurance is income replacement and protection after the policyholder dies. Life Insurance is NOT a form of investing, no matter how appealing the brochure may seem.
Not everyone actually needs life insurance. If you’re young, single, have no children, and have no one relying on your paycheck, no one will be financially impacted when you die. If you are older and debt-free (your children will be adults) and have lots of money saved for your retirement, then you don’t need life insurance either. Life insurance has a purpose, but for many people, that purpose is temporary and takes place between the time you get married and the time your youngest child goes to college.
Now, just to clarify that thought, life insurance is meant to be a temporary protection. The thought of temporary protection disqualifies a large number of these types of policies.
There are two common types of life insurance products: term and permanent. The name tells you everything you need to know about term life insurance: it provides protection for a specified time frame. You can choose to have protection for 15, 20, or even 30 years; when that time period ends, so does your coverage unless you renew. Term life is really inexpensive and very effective.
Permanent life insurance is in effect as long as you continue making premium payments. While you may encounter many different types of permanent life insurance policies (whole life, universal life, variable life, etc.), all of them provide the same lifetime protection with locked-in premiums. The lifetime protection sounds great and is reassuring, but it can also be too good to be true.
Permanent life insurance is too costly. Permanent life insurance usually costs you approximately 15 to 20 times more than term life insurance from the same company for the same death benefit, not 2 or 3 times more, but 15 to 20 times more.
A healthy 30-year-old man would pay $20 per month for term life insurance that provides $1,000,000 in coverage; however, if he were to purchase that same coverage with whole life, his monthly premium would be greater than $300. Same death benefit. But a massive difference in premium.
What is the reason? You are prepaying for getting older. While you are young, your insurance company has very little risk with regard to you dying, and therefore they will charge you very little for coverage. However, as you get older, the risk of death increases significantly, and so does the amount you will pay for insurance coverage. With permanent insurance, the insurance company forces you to overpay by many years for the future risk of dying when they will have to pay out a claim.
And here is the secret part that they don’t tell you upfront: while they are waiting for you to die, they invest your premiums.
Let us pretend for a moment that you are the insurance company. You take in premiums of hundreds of dollars every month from a customer for several decades, and then you invest that money over time, and by the time that customer dies, you will have made millions off of their premiums and will pay them the death benefit, plus keep everything else. This is completely permissible and, as such, it generates a substantial profit for an insurance company.
If that individual had taken the difference and put it in an investment rather than giving it to an Insurance firm, then that person would have had an investment that they could have benefitted from when they were alive, as well as leaving behind an inheritance for their family when they died.
People buy permanent life insurance because they are being sold on the idea of Security, Certainty and Responsibility. There is no expiration date; there are no last-minute surprises regarding becoming un-insurable; thus, it is something that appears to be the responsible adult choice.
However, when buying permanent life insurance, what is communicated as security today is actually, in effect, a stealth deduction from your future. Therefore, it is nothing more than a glorified scam due to clever advertising.
So what can actually help you? The best solution is to go Back and to Keep it Simple! If someone is relying upon your income and could struggle to maintain a standard of living due to that loss; purchase Term Life Insurance. In most cases, fifteen or twenty years are sufficient to cover the period of dependency; therefore, insurance coverage of approximately ten to twenty times your annual income represents a good benchmark. If you no longer need it, cancel the policy and get off with your life!
Keeping a permanent life insurance policy you bought in the past can present a problem. You have already invested and sunk costs, which are not recoverable, but just because you own it for many years and have paid a premium every year does not mean you will ultimately benefit from it, or that it will ever be a good product for you.
Becoming educated about the realities of these policies can help people to avoid making this mistake in the future. Once you have educated yourself about the realities of this type of insurance policy, don’t forget to share the information with others and teach them to avoid this mistake as well.
The truth is that one financial decision you made could haunt you for many years. The good news is that even though you see the walls closing in, you still have room to escape this situation. Find a way to get out before the walls crush you.
