Life Insurance 101: What You Should Know
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Life Insurance 101: What You Should Know

Life insurance button on a keyboard

Have you ever heard that phrase "The rich get richer, and the poor get poorer?" There's some truth there. If you've ever wondered how the rich always seem to get richer, we're going to tell you. They do it with life insurance.

No one wants to face their mortality. That's why many folks avoid life insurance — because they don't understand it, and it sounds like a death sentence. The truth is that life insurance is a trustworthy long-term investment for retirement. AND it can be a way to guarantee an estate for your children, grandchildren, or anyone you love. We know life insurance is complicated. So here, we'll introduce you to the basics.

Two Kinds of Life Insurance

There are only two types of life insurance. They are:

  • Whole Life
  • and Term Life

No matter which company you're working with, or what name they use for the insurance policy, it is one of those two types.

Whole Life Insurance: a Long Term Investment

Whole life insurance is permanent, thus the name "whole life." It's more expensive because — in addition to guaranteeing a death benefit to someone you love — it builds cash value over the years.

The insurance company invests a part of your premium (insurance bill) on your behalf. Since the insurance company is working with billions of dollars, they earn a far better interest rate than any consumer does. But it's a long term investment. Growth doesn't happen overnight. So you let the insurance company save money for you for a long time.

Then, as the years go by, you can:

  • Use the cash value as collateral for a loan on a home or car.
  • Borrow money out of the cash value and pay it back quickly. If you've ever had your refrigerator go out a few days before payday, you know how valuable this could be.
  • Cancel the policy and keep the cash value.
  • Or sell the policy to a life settlement broker. These folks buy life insurance policies for more than the cash value. They'll keep paying the premiums and eventually collect the full death benefit when you pass. If you've ever wondered what "hedge funds" are, now you know.

Modern insurers are coming up with new bells and whistles, and new names for them, but any policy that builds cash value is a whole life policy.

Term Life Insurance

"Term" means time. Term life insurance is intended to cover you for a set amount of time and doesn't build a cash value. It's far cheaper than whole life, but the insurance company isn't investing any funds for you.

The insurance company invests a part of your premium (insurance bill) on your behalf. Since the insurance company is working with billions of dollars, they earn a far better interest rate than any consumer does. But it's a long term investment. Growth doesn't happen overnight. So you let the insurance company save money for you for a long time.

Term products are ideal for folks who:

  • Want to make sure the mortgage is paid off for their spouse if they die.
  • Want to leave a large cash estate to someone they love.

Your "term" might be five years, ten years, even thirty years. You'll pay your monthly fee, and if you pass away, your beneficiary gets a big chunk of cash. But once your term is up, you don't get back any money. You'll need to start a new contract with the insurer. And it will probably cost a lot more.

  • The costs of term life insurance go up as we age.
  • A healthy 20-year-old will pay far less than a healthy 60-year-old.

Ultimately, your choice in life insurance is a personal one. And there's no reason you can't have both types of policies — use a whole life policy to save for retirement, and a term life policy to provide a big payment to your family if you pass. That's how the wealthiest folks do it.

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