life insurance. Aside from the ridiculously uninformed, commission hungry, and overly aggressive agents; there is a plethora of confusing jargon that reads like a foreign film screenplay. In the next few months in the Markowski Monthly we will be answering some of the most important and frequently asked questions regarding life insurance.
DO I NEED LIFE INSURANCE?
This is the question mostly asked when dealing with new clients. The answer to this comes in the form of another question, “Would your death leave anyone that you care about in a difficult financial situation?” Everyone has different situations so the amount of life insurance is relative. For example, if I were to meet an untimely end, I would want everything to be taken care of in regards to our mortgage, our children’s education expenses, automobile, health, etc. My biggest concern is not having my family’s lives turned upside down and uprooted. My plan covers that. In my opinion once you become a parent, the breadwinner(s) in the household should have coverage that will last until the youngest child gets through college. If a family cannot afford such coverage a good alternative is a policy that will cover childcare expenses so the surviving parent can get back to work.
If you are a member of a family that has a dual-income and no children, you might still need a policy to cover some largely shared financial obligations. For older individuals whose children have left the nest, life insurance should be used to offset estate taxes. If titled correctly, the proceeds from life insurance are both tax-free and estate tax free and can be used to pay off Uncle Sam.
To know how much coverage you need, you need to weigh your dependents’ spending needs against their future income and assets. If you need help with this contact Matthew Markowski at (800) 447-0579 or e-mail him at firstname.lastname@example.org. We have a worksheet that will help you in figuring it all out. This worksheet will help you in balancing costs (child care, funeral charges, taxes, etc.) against income (investments, social security, etc.). These numbers need to be updated every couple of years as well!
WHAT TYPE OF LIFE INSURANCE SHOULD I OWN?
More often than not if you ask an insurance salesperson that question, before the last syllable roles off your tongue, he/she has answered your question with PERMANENT LIFE! (Permanent life comes in the forms of whole and variable. With whole life your money grows at a fixed rate. With variable life your money is invested in mutual funds which go up or down with the market.)
Does this sound familiar… “Sure, variable life costs more than term, but over time you will build up a cash value that you can retire on.”
If you fail to read the fine print that your agent has failed to tell you it is that it will be a long time before you will see any of the cash value being built up. For the first two to ten years, parts of your premiums are paying the agents commission. After that the annual maintenance charge is usually around 2% of your cash value. Plus some states charge a 2-3% tax on your premiums. In most cases, people are better served owning a term policy and putting the money saved to work in an IRA or 401K.
Bob is a healthy 38-year-old and qualifies for preferred rates. If he were to buy a 250k variable life policy it would run him about $2,500 a year. If the money in the investment account does very
well and shows an 8.5% return over 20 years Bob will have $97,362 in his account. If Bob bought a 250k term policy at over 20 years it would cost him around $225 a year. That gives him a savings of $2,275 to invest in an IRA or 401K. If Bob earned the same 8.5% return over 20 years his account would be worth $121,687.
Permanent life policies are logical in certain situations. For individuals who consistently have income left over after maxing out their other tax-deferred retirement accounts. Permanent life is also a viable option for older people because they lose price advantage as they reach their 60’s. Furthermore, permanent life does not have to be renewed later in life at higher rates. A good idea when purchasing permanent life is to invest a large sum upfront in the policy, which allows for earnings to grow much faster.