Many entrepreneurs wear many hats, which can include the hats of husband, wife, father, or mother. Having a family can bring blissful life moments, but managing the nuisances of said family also requires various levels of risk planning. If the unfortunate occurs and you pass away before your kids become “efficient adults,” this could leave a major burden on your partner, not to mention the issues that your kids have as they potentially struggle to start out in life on a solid framework. There’s really two main types of life insurance products, there’s the Term Life policy and then there’s an assortment of Permanent Life policies.
Not Every Life Insurance Agent Is Created Equal
Life insurance helps insure against these situations, however, not every life insurance agent is created equal in terms of ethics and professionalism. Some agents will promote policies that bulk up their commission, rather than prescribing the “right” policy for your situation. For this article, I will discuss term life insurance versus the other types of life insurance policies on the market and how you as a small business owner, can determine how much life insurance is required.
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Term Life Insurance
Term Life is strictly life insurance, which means the premiums you pay each month are going strictly towards a death benefit that’s paid to your beneficiaries if your death is one of the “covered” deaths under the policy. Because you are strictly paying for “life insurance”, the premiums are pretty low.
- Opponents of Term Life point to the fact that if you don’t die within the policy coverage duration, then you “lose” all of the premiums paid.
- I believe viewing any insurance product like this is a faulty vision, as you are paying for an insurance service and if the service provided said insurance coverage, then you received the product you paid for.
- It’s just like when you pay for six-to-12 months of car insurance and don’t get into an accident during the policy term, it’s not as if you “lose all premiums paid,” but instead you were covered during that period of time in case said accident occurred.
- However, there is a rider that can be applied to Term Life called a “Return of Premium Rider.” This can be applied as a rider to Term Life policies and works to where if you don’t die during the policy duration, then all premiums paid in can be returned at the end of the policy coverage period. Having this rider on the Term Life policy would increase the overall premiums though, but the fact that if you don’t die then the premiums paid in could be returned to you, is a side benefit that many people prefer.
Permanent Life Insurance
Permanent Life Insurance is one that actually covers the insured entire life, with the premiums being paid in covering not just a death benefit payout, but also building cash value aspects within the policy that might be utilized later down the line for policy loans.
The aspect of cash value being tied into the policy creates all sorts of nuisances that drives up costs and causes many Americans to not deal with the level of complexity. In addition, seeing as though most Americans will not have a need for life insurance their entire life, this makes Term Life even more of an attractive option for most Americans.
There are actually a couple different variations of Permanent Life insurance products but the main three include Whole Life Insurance, Universal Life Insurance, and Variable Life Insurance.
Whole Life Insurance: In general, a Whole Life policy will have premiums that are fixed for the duration of the policy and the cash value aspect is similar to a savings account with a guaranteed minimum rate of return. But a Life Insurance Agent does have additional ways to restructure a Whole Life policy, however, in general, this is how a Whole Life policy would operate.
Universal Life Insurance: This allows the policy owner to change death benefit and premium structures throughout the policy term. Also the policy owner has the option to use cash value monies to pay for premiums. In relation to cash value aspects, there is a minimum interest rate that’s applied but if the insurance company’s portfolio operations outperforms, the excess amount would be applied to the cash value totals.
Variable Life Insurance: This is where the cash value aspect is pretty much tied to certain mutual fund like “sub-accounts” that are setup within the policy. The investments are in vehicles such as the stock market, which means with market booms there can be great growth, or market crashes, there can be major losses. A plus here though, is that any cash value growth is not taxable as ordinary income.
Bank On Yourself, Be Your Own Banker, and Infinite Banking Concepts
To wrap up this article, we have to take a look at a marketing concept that many Life Insurance Agents are using in order to get more Americans to purchase Permanent Life Insurance.
It’s no secret that Life Insurance Agents are paid more commissions when they sell a Permanent Life Insurance policy compared to that of a Term Life Insurance policy, so trying to get clients to sign up for Permanent Life Insurance in any form or fashion, becomes the goal of many Life Insurance Agents.
- So the concept being sold is that one can become their own banker, through living off the policy loans that they are allowed to take through the Permanent Life Insurance products.
- The Life Insurance Agent would actually setup a couple of riders on a Permanent Life Insurance policy and have the policy owner “overpay” the policy in an attempt to build up the cash value aspect “quicker,” allowing for the utilization of “policy loans” to kick in faster. The owner would then begin using the policy loans for various purchases and other procedures.
There are so many nuisances, issues, and complications with using this strategy that myself along with other trusted and credible financial professionals do not recommend that the typical American family purchase any insurance product with the goal of using it as a separate investment vehicle.
Yes, Permanent Life Insurance allows for cash value build up in a variety of ways, but it’s always been my recommendation to “buy term and invest the rest.” If you are of one of many Americans that might have issues with “investing the rest,” please refer to a trusted financial advisor or CPA who can assist, rather than referring to a Life Insurance Agent who might not be looking out for your best interest, but might instead be looking out for his commission check.
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