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Life Insurance 101

Life Insurance 101 This is a topic for mass debate - schools of thought reign supreme here just like in the old school of what car company do you prefer - Ford, Dodge or Chevy. This is a much more important topic than just bragging rights; it is the future of families. This has been a sad month for us as we lost two clients - young clients. I'm sad to say we lost a 43 year old woman and a 32 year old man this month - unfortunately both had children. There are now three little girls without parents and an infant boy without a father. The life insurance policy is like a modern miracle - it comes to life just when it is needed and gets the job done that no other financial vehicle in the world can do.

I'm going to define the various insurance policies, what they do and don't do and how you should position them in your world - if at all. This is all factual information - verifiable with financial models and not debatable. Read carefully and act accordingly since this is something you can't mess up and fix later on. The life insurance decision is one based on wants not needs. You don't need any - the government says you need the life insurance benefit social security provides - $255.00. The government says you need auto insurance - to protect someone else, not our own family. Here are the types of policies and what they do and don't do.

Term insurance
As the name implies it is intended for a specific term in time, typically one, five, ten, fifteen, twenty or thirty years. The price can be level or increasing periodically - as the policy renews. This is great for needs that are finite - paying for a loan, transferring a business, protecting a college education, etc. Term is initially very cheap but ultimately unaffordable when you'll statistically need it. Now there is

Universal life
It combines term insurance costs with a 'side fund' which will accumulate over time. There are some moving parts here where the policy can dissolve (we call it explode) as you age based on what you are putting in, how the insurance and administration costs rise and what the interest rates are. Riders can be added to these policies to guarantee they'll never expire or they'll be paid for at a certain point or all at once. Be careful here - use only top rated companies and use conservative assumptions.

Variable Universal Life
Very much the same but the investment options are yours to choose. The same warning applies - choose solid companies with a history of doing the right thing - choose smart investments here too - they'll make or break you.

Whole Life
As the name implies: good for your whole life. No moving parts here - premiums are fixed, cash value is fixed and death benefit is fixed. Two types of firms issues these policies - stock and mutual - stick with the mutuals. If dividends are paid (mutuals only) they'll increase overall policy values. All of the non term policies can have "riders" that add various benefits - always add waiver of premium and typically avoid AD&D (accidental death & dismemberment). The decision of what type of policy to use is predicated by how long you want to have it and what your exit strategy is - how will you ultimately spend your money and pass your estate on to the next generation. Most people need both types and the wealthy need permanent.

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