Life Insurance - Term or Cash Value

When shopping for new or replacement life insurance you need to know what type of coverage to buy. For most situations, term is a better option, but not always. Educate yourself on the two types of life insurance and ask lots of questions when buying a new policy. Here are a few things to consider:

Term Insurance
Pros
- Term insurance provides a set amount of coverage for a set amount of time (term).
- Term is less expensive than cash value/permanent insurance.
- Term can rates do not increase during the policy period/term.
- Term insurance is pure insurance and does not involve surrender charges, maintenance fees, and other costs typically associated with cash value policies.
- Term insurance pays the full face value of the policy if the insured dies.

Cons
- At the end of the term you may not be insurable or the premiums may be extremely high due to increased age or health issues.

Cash Value Insurance
Pros
- The coverage and premiums remain constant even if you have had a major health event (i.e. heart attack, cancer).
- In some cases, the cash value in the account is enough to cover premiums and would eliminate the need to pay for the life insurance in the future.
- Cash value policies provide a dual purpose of paying for life insurance while investing at the same time.

Cons
- The life insurance provided is expensive - you can get 3 or 4 times of term coverage for the same cost
- Annual fees and maintenance costs are extremely high, and most policies contain a surrender charge if you cancel the policy.
- Your cash balance is not really your cash balance.
* If you die, the face value of your policy is reduced by your cash balance (i.e. you have $100k cash value life insurance policy with a $10,000 cash balance. Upon your death you would receive $100,000 - not the $110,000 you should receive.
* If you borrow all or part of your cash balance, you can be required to payback the loan with interest - TO THE INSURANCE COMPANY!
- The savings vehicles inside the cash value policies are expensive and often have marginal returns at best.

Ideally, if you are proactive and disciplined, you can buy the right amount of term insurance and invest the difference you would pay in No Load Mutual Funds. See for yourself. Get a quote for $100,000 of Cash Value/Permanent life insurance. Ask what the maintenance fees, surrender charges, surrender period, and other fees associated with the policy would be. Then ask for the 5 & 10 year returns of the mutual funds the agent says you will invest in via the Cash Value policy.

Then go to an on-line service like Select Quote www.selectquote.com and get a quote on a 20 year term policy with a face value of $100,000. Now take the annual savings and multiply that by 20 years and see how much you could invest. Also, consider the fact that the term policy does not have annual maintenance fees or surrender charges. You can cancel the term insurance at anytime without being charged a surrender charge.

The bottom line is, you should always purchase financial products like life insurance - never allow someone to sell them to you. Life insurance agents are very good at accentuating the positives of cash value (high commissions for them and very profitable for their company), but do not typically tell you the whole story. Educate yourself while you are shopping and ask lots of questions

There are several great articles on financial websites. I ran across the following article on MSN Money

http://articles.moneycentral.msn.com/Insurance/InsureYourLife/TheRagingDebateOverTermvsWholeLife.aspx

Reducing Debt

My wife and I spent the first couple of years of our marriage living paycheck to paycheck. We were young and didn't make very much money, and our debt seemed insurmountable. To make matters worse, we continued to spend money we really didn't have and go deeper into debt. We were miserable and had to make a change. We decided to make some pretty quick and dramatic changes in our financial life.

We decided to sell our condo and move back into an apartment. This would free up housing cost and eliminate some of our monthly expenses (i.e. association fees). We agreed that we would not consider buying a home again until we had paid off all of our debt, saved enough for a comfortable emergency fund and down payment on a new home.

Our method for paying off our debt was a little unusual. We created an inverse pyramid with our debts listed smallest to the largest. After a debt was paid, we would add the payment amount of the debt we had just paid off with the next smallest debt. The process continued all the way up the pyramid until all the debt was paid.

During this process we learned a lesson about our spending habits - we had bad spending habits. I guess you could say we were convenience spenders. We would go out to eat after work rather than cooking, and we really couldn't tell you where our money went each month. This was another area we had to change.

The obvious answer to this was a budget. We decided to create a budget each month and use cash rather than our usual credit cards. To solidify our commitment to this, we cut up all of our credit cards. We each kept a Visa debit card, but all of our true credit cards were gone.

Living on a budget was difficult for us - the convenience spenders. Now we had choices to make and a budget to keep. Too much spending on Friday night could wipe out your entire entertainment budget for the weekend. We learned pretty quickly that we had to be careful on the weekends.

Keeping to the budget did have a benefit we had not anticipated. Remaining faithful to our budget actually freed up a great deal of our money and allowed us to put more toward retiring debt. Each paycheck brought the excitement of determining how much additional payment we would be able to make toward our debt repayment plan. Prior to this our paychecks were gone before we received them and we were barely making the minimum payments on everything.

Paying off our debt was such a liberating feeling, and paying the debt from smallest to largest kept us motivated and it really picked up pace as we leveraged the payments paid off debt against the remaining debt. Most financial advisers say to pay off debt with the highest interest first, but for us, feeling the rush of paying off the smaller debts really worked for us.

We were so excited when the time to pay off our last debt - a $5,100 credit card balance. I was supposed to get a bonus that would allow us to wipe out that credit balance and be debt free so we wrote (or I guess you would say that we we floated) a check to the credit card company. We took the opportunity to write all kinds of comments on the check like "we're debt free" and "here's the last of the money you will see from us." Just to emphasize our point, we used a spray paint pen to make these comments. Unfortunately, my bonus got delayed 1 pay period and we had to call and ask them to not process our payment. When I explained the situation to my bank, the nice lady stopped the payment because she said I changed my mind about the payment (she pointed out to me that it was against the law to write a check if you knew there were not sufficient funds to cover it). My wife mused that they probably had our check posted in their office somewhere for everyone to laugh at. Needless to say, we didn't make the same mistake when we sent the "final" final payment a few weeks later.

A few years after we became debt free I stumbled across a guy on the radio who advocates the changes my wife and I took to eliminate our debt. His name is Dave Ramsey and he now has a nationally syndicated talk show about personal finance. You can also listen to his shows live or archived at http://www.daveramsey.com via his website.

We created an inverse pyramid of debt (smallest to largest). Dave suggests the same thing and calls it the debt snowball (definitely a catchier term than inverse pyramid of debt). He also says everyone should live on a budget and pay cash for things. I wish we had found Dave when we were setting up our plan. It would have made things a little easier.

Getting scared about debt and controlling our spending was one of the best things that could have happened to us, and it was particularly beneficial to us that it happened early in our marriage. My wife and I can attribute our current financial success to a few things in our life and changing our spending habits and use of debt is definitely one of them.