Being properly insured is part of having your finances in order. Insurance will protect you and your family far better than an emergency fund in the event of a disability, critical illness, or death. Nevertheless, it’s something many young people neglect.
In recent weeks, a handful of readers have approached me with questions about cash-value life insurance. I’m not sure if it’s increasing in popularity, or you simply don’t become a target of insurance salespeople until your late-20’s and early-30’s. Regardless, there seems to be an increasing trend of insurance policies being pushed on millennials.
Beware anyone that stands to gain a percentage of your investment when you purchase a financial product, because it is in their best interest to get you to pay as much as possible, not ensure you get what you need.
The difference between Term Life Insurance and Cash-Value Life Insurance
Term Life Insurance provides coverage over a certain term for a fixed monthly payment. In the event of your death, a beneficiary you designate will be paid out the value of your policy. You are covered for a term, typically 1 to 30 years, and when the term ends, your coverage expires and you have to renew or start a new term plan. The price of your monthly premium is constant for the term, but typically increases with your age when you renew.
Cash-value life insurance is not a not a scam, but it isn’t a great financial product
Cash-value life insurance is sold as a tax-free investment vehicle. Usually the salesperson will try to position it as a secret product only the wealthy know about. Heads up: you’re not wealthy enough to make it useful.
Cash-value life insurance is ridiculously more expensive than term life insurance
It’s not uncommon to see premiums for a cash-value life insurance policy as high as $700 or $800 per month. Even with a good income, this is a hefty bill, and will likely prevent you from being able to save in more traditional savings vehicles, like your retirement accounts. Your cash-value life insurance is not as liquid or as useful as other savings accounts, so if this is the only place you can afford to save, you’re going to run into trouble when you need to access your savings.
The incredible returns are not guaranteed, and the fees suck
Your insurance agent will brag about the amazing returns of your cash-value life insurance but, like everything else, it is absolutely not guaranteed (even if they say it is). Those projections are estimates, just like everything else. It’s true that the money will grow tax-free, but it’s also true your salesperson will make a killing on commissions & fees from you first. Life insurance agents typically make 80% to 100% in commissions of the first year’s policy premiums.
Remember that next time they tell you about how this will be such a great wealth-building tool for you.
Stay away from Cash-Value Life Insurance, and stick with Term Life Insurance
20- and 30-somethings can get term life insurance at great prices ($20/mo or less usually!) or receive plans from their employers. If you need life insurance, just get an affordable term life insurance plan, and reinvest the hundreds of dollars you’re not putting into a cash value plan into the stock market instead.