In this ongoing series of articles we have been looking at safe and prudent ways of creating and preserving wealth in both 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 continuing bear (down) market. This has cost investors across the country huge losses needlessly.
No less important for many is the purchase of life insurance and how to buy it correctly. To try to help the consumer do just that, we will examine and try and solve this little understood process in a question and answer format.
Q. When did life insurance begin and why is it so misunderstood?
A. The earliest known life insurance policy was in 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 what is the best buy?
A. The two main types are term and cash value, also known as whole life, universal life, etc. Term is the basic kind of insurance without cash value and if done correctly gives you much more insurance for much less cost.
Q. Isn’t a savings account such as cash value a better buy?
A. No. When investing it is better to invest outside an insurance policy rather than in one.
Q. Can you be more specific about term insurance?
A. Term is life insurance for a period of time, or term, as the name suggests. It can be annual renewable term, in which the premium rises each year, decreasing term, in which the amount of coverage goes down each year with the same premium, or it can be level term, in which the coverage and premium stay the same for a period of time.
Q. Should some people have cash value life insurance and others term?
A. Throughout my career in the financial field I have heard this for many years and I still have not come across anyone anywhere who benefits from paying more and getting less.
Q. What are some of the problems with cash value life insurance?
A. There are many. In standard whole life, if the policy holder dies, the beneficiary only gets the face amount but not the cash. The companies have long stated about getting dividends with your cash value, but U.S. Treasury Decision Number 1743 going back to 1911 declared that dividends are “simply refunds to the policyholder of a portion of the overcharge collected.” It is not a good idea either to borrow against your cash value because you are paying interest to use your own money. In universal life, you have a stated rate of interest declared by the company. In universal variable life you choose your own investment vehicle, which means you pick your own level of risk! There are also many fees and charges in these types of policies that you may not be aware of. Keep in mind also that the company’s premiums get paid one way or another, and this can include using your cash value to pay for it.
Q. How can someone really understand the correct way to purchase life insurance and who really needs it?
A. Let’s suppose Walmart is selling brand X refrigerator for $1,000 (cash value) and let’s suppose Best Buy has 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 to invest OUTSIDE the insurance policy. In this way you get maximum value of both. You only need life insurance in the first place if someone is financially affected by your death. Children generally need little to none as they are not normally the main bread winners. On top of everything else, term is far easier to understand and follow.
Remember to only buy life insurance when it is needed and for as long as it is needed. The rule of thumb is to purchase at least five times your annual salary. Once your savings, 401K, IRA, etc. is substantial enough for your needs, you no longer need it.
For further information on creating and preserving wealth 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.
Source: Berkshire mont