Money Girl helps you understand what kind of life insurance is right for your situation.
Money Girl
312 MG Tips to Buy Permanent Life Insurance (Part 1)
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Again, visit morganstandley.com/investedatwork to listen today. Hi, everyone. Thanks for downloading another weekly edition of Money Girl. I'm Laura Adams, the author of several books and audiobooks, including Money Girl's Smart Moose to Grow Rich. You can find the paperback or ebook at your favorite bookseller. I received this question from Courtney. Can you talk about permanent life insurance, particularly whole life? I'd like to know when it makes sense to buy it instead of a term policy, especially when you're young and healthy. Permanent life insurance comes in many shapes and sizes. In this two-part series, we'll cover the basics so you know how it stacks up against a term life policy. Plus, I'll give you tips to buy permanent life insurance if it's the right choice for you. In Courtney's question, she mentions the two main types of life insurance, permanent and temporary, which is also known as term insurance. Term life insurance covers you for a specified period of time only, like 10 or 20 years. You pay a fixed annual premium and receive a guaranteed death benefit. Let's say you have a $500,000 term policy that covers you through the end of 2030 and your spouse is the beneficiary. If you die before the end of 2030, your spouse would be entitled to a death benefit of half a million dollars. But if you die after 2030, your beneficiary wouldn't receive a dime because your policy would be expired. If you buy term life when you're relatively young and healthy, it's very inexpensive. For instance, if you're in your 40s, a $500,000 policy might cost a few hundred dollars per year. You can typically renew a term policy for an additional term before it expires. However, as you get older, the price increases significantly. Permanent life insurance, on the other hand, covers you for your entire life, no matter if you live to be 100 years old. In addition to providing a death benefit for your beneficiary, it's also a financial investment. A portion of each premium you pay goes into an account that builds cash value on a tax-deferred basis. This is what makes permanent policies much more complex and expensive than term. The three most common types of permanent life insurance are whole, universal, and variable. We'll cover whole life in this episode and save universal and variable for part two of this series. With whole life insurance, you pay a fixed annual premium, get a guaranteed death benefit, and a guaranteed rate of return on your cash value. This is the most straightforward type of permanent life policy, but it's also the most expensive. The reason whole life costs more than other types of term or permanent life products is because the premiums can never be increased throughout your life. Statistically, your chances of dying are very low when you're young and healthy and increased as you get older, right? So the product must be priced as if you're going to live to a ripe old age. That means in the early years of a whole life policy, the premiums are much higher than you'd pay for other types of life insurance. After the insurance agent receives a commission, a portion of your premium goes into conservative, fixed income investments. That's how the insurer generates a guaranteed return for you. After a set period of time, you have some flexibility with the cash value in a whole life policy. For instance, you may be able to borrow against it or even cancel the policy and cash out an amount known as the surrender value. However, the longer you own a whole life policy, the greater your total return will be. Let's say you're like Courtney and are wondering what kind of life insurance to buy. Since the annual premium for a whole life insurance policy can cost as much as ten times that of a term policy, you need to have a very good reason for buying it. First of all, be certain that you need life insurance. If you don't have dependents, a spouse or a partner who would suffer financially if you died, then you may not need life insurance. The purpose of life insurance is to make sure people who depend on you could maintain their lifestyle or reach certain goals like going to college if you weren't around. September is a great month for planning. We start thinking about the rest of the year, whether it's back to school, big year-end work projects, holiday plans or travel. Planning ahead is crucial in life, especially when it comes to what happens when you're gone. Getting life insurance may sound daunting, but policy genius makes the process a breeze. With policy genius, you can find insurance policies that start at just $292 a year for a million dollars of coverage. Some options offer same-day approval and avoid unnecessary medical exams. Policy genius's technology lets you compare quotes from America's top insurers and just a few clicks to find your lowest price. It's the country's leading online insurance marketplace. And if you ever need help or guidance, they have an expert license support team to answer your questions handle all the paperwork and advocate for you throughout the process. It's never too late to plan ahead. Go to policygenius.com or click the link in the description to get your free life insurance quotes and see how much you can save. That's policygenius.com. We could try to explain what it feels like to get your work done on a John Deere. The way a Z-Track Moer finishes in half the time you thought it would or how much easier it is to move mountains of soil with a one-series tractor. We could even go into detail about how it feels to tow up to 4,000 pounds behind a Gator SUV. But if you really want to know what it's like to run with us, you just have to get in the seat. Learn more at jondere.com/getintheseat or visit a D.R. near you. At Capelli University, learning the right skills could make a difference. That's why our business programs teach you relevant skills you can take from the course room to the workplace. A different future is closer than you think with Capelli University. Learn more at Capella.edu. For many people, buying an inexpensive 20-year term policy is plenty of protection. However, if you're certain that you want one or more beneficiaries to receive a payout no matter when you die, then you need a permanent life policy. This might be critical if you have a disabled family member, for instance, who can't earn income or requires expensive ongoing care. In addition to providing long-term financial security for dependence, permanent life insurance can also be part of a savvy estate planning strategy. Your heirs can use the death benefit to pay estate taxes, so they're never forced to sell off your assets to satisfy Uncle Sam. However, for 2013, you get to exclude up to $5.25 million of estate tax. So this would only be a good strategy when your net worth is substantially higher than the annual exclusion. But keep in mind that the estate tax exclusion is likely to drop in the future. To sum up, whole life insurance generally is not recommended for young people because it's so expensive. You have to pay upfront fees and commissions that usually reduce your annual return on the investment part of the policy when compared to typical market returns. Most people are better off making low fee investments inside a retirement account, such as a 401(k) or IRA that can provide more growth and then buying an inexpensive term life policy to protect their loved ones. Join me for part two of this series where I'll cover what you need to know about universal and variable life insurance. They offer more flexibility and potential benefits than whole life. Once you understand the range of permanent life insurance products that are available, you'll know if it's the best choice for your situation. For more money tips, tools, and advice, be sure to follow me on Facebook, Twitter, or Google+, also sign up for the free Money Girl newsletter. You'll find links to everything I've mentioned and a transcript of this show on the Money Girl page at quickanddirtytips.com. Just look for episode number 312, called Tips to Buy Permanent Life Insurance Part 1. I'm really glad you're listening to Ching. That's all for now. Courtesy of Money Girl, your guide to a richer life. Betterment LLC is an SEC registered investment advisor. Brokerage services are offered by Betterment Securities, an SEC registered broker dealer and member FINRA SIPC. Investments are not FDIC insured and have no bank guarantee. They may lose value. Investing in securities involves risks and there's always the potential of losing money when you invest in securities. Before investing, consider your investment objectives and betterment's charges and expenses. Not an offer or solicitation of an offer or advice to buy or sell securities in jurisdictions where betterment and betterment securities are not registered. At Capella University, learning the right skills could make a difference. That's why our business programs teach you relevant skills you can take from the course room to the workplace. A different future is closer than you think with Capella University. Learn more at Capella.edu. Curious how equity compensation can help build employee financial confidence and move your business forward? Tune in to the latest episode of Morgan Stanley at Work's Invested at Work podcast where we explore the power of financial benefits and how they can help your employees in the workplace and beyond. Listen now by visiting morganstandley.com/investedatwork or stream on Apple or Spotify. Because we believe that when employees thrive, your company thrives too. Again, visit morganstandley.com/investedatwork to listen today.