Demystify life insurance [Column] – Reading Eagle
In this ongoing series of articles, we’ve looked at safe and prudent ways to create and preserve wealth in good and bad markets. My key premise of never exposing your hard-earned retirement/savings to risky stock markets has again been validated with the continued bear market. This has needlessly cost investors across the country huge losses.
No less important to many is buying life insurance and how to buy it correctly. To try to help the consumer do just that, we’ll examine and try to solve this little-understood process in a question and answer format.
Q When did life insurance start and why is it so misunderstood?
A. The earliest known life insurance policy dates back to 1583 in Genoa, Italy. The other part of the question is best answered by lack of knowledge and education.
Q What are the types of life insurance and which is the best buy?
A. The two main types are term and cash value, also known as whole life, universal life, etc.
Q Isn’t a savings account such as cash value a better buy?
A. No. When investing, it is better to invest outside of an insurance policy rather than just one.
Q Can you be more specific about term insurance?
A. The term is life insurance for a period of time, or term, as the name suggests. It may be a renewable annual term, in which the premium increases each year, a decreasing term, in which the amount of coverage decreases each year with the same premium, or it may be a level term, in which the coverage and premium remain the same for a period of time.
Q Should some people have cash value life insurance and others should have term insurance?
A. Throughout my career in finance, I’ve heard this for many years and still haven’t met anyone who benefits from paying more and getting less.
Q What are some of the issues with cash value life insurance?
A. There is a lot of. In standard whole life insurance, if the policyholder dies, the beneficiary only receives the face amount, not the cash. Companies have long said that you should get dividends with your cash value, but US Treasury decision number 1743 dating back to 1911 said dividends are “simply refunds to the policyholder of a portion of the overcost perceived”. It’s also not a good idea to borrow against your cash value, because you’re paying interest to use your own money. In universal life, you have a stated interest rate declared by the company. In universal variable life, you choose your own investment vehicle, which means you choose your own level of risk! There are also many fees and charges in these types of policies that you may not be aware of. Also keep in mind that company bonuses are paid one way or another, and this may include using your cash value to pay for them.
Q How can anyone really understand the right way to buy life insurance and who really needs it?
A. Suppose Walmart sells a Brand X refrigerator for $1,000 (cash value) and suppose Best Buy offers the same model for $300 (term). Obviously the $300 refrigerator is a better buy and it also saved you $700 that you would have spent investing OUTSIDE of the insurance policy. This way you get the maximum value of both. You only need life insurance in the first place if someone is financially affected by your death. Children usually need little or nothing at all, as they are normally not the main breadwinners. On top of everything else, the term is much easier to understand and follow.
Remember to purchase life insurance only when needed and for as long as needed. The rule of thumb is to buy at least five times your annual salary. Once your savings, 401K, IRA, etc. is large enough for your needs, you no longer need it.
For more information on Wealth Creation and Preservation, we can be reached at 610-370-5932 or by visiting our website at
Howard S. Blanck is an independent senior financial advisor in Reading and a retired high school social studies teacher, as well as the author of “Easing the Economic Blues” and numerous other financial publications.