Title:

A CPA Talks About Buying Life Insurance

Word Count:

666

Summary:

Want some straight talk on what kind of life insurance you should buy--and how much life insurance you

should buy? Bestselling author & CPA Stephen L. Nelson shares some tips.

Keywords:

life insurance, insurance, financial planning

Article Body:

Not everyone needs life insurance. The first thing to do is make sure you need it. Life insurance is really

meant for your family members or other dependents who rely on your earnings.

<b>Why You Buy Life Insurance</b>

You buy life insurance so that, if you die, your dependents can live the same kind of life they live now.

Strictly speaking, then, life insurance is only a means of replacing your earnings in your absence. If you

don’t have dependents (say, because you’re single) or you don’t have earnings (say, because you’re retired),

you don’t need life insurance. Note that children rarely need life insurance because they almost never have

dependents and other people don’t rely on their earnings.

<b>Life Insurance Comes in Two Flavors</b>

If you do need life insurance, you should know that it comes in two basic flavors: term insurance and cash-

value insurance (also called “whole life” insurance). Ninety-nine times out of 100, what you want is term

insurance.

<b>Term Life is Simple to Buy and Understand</b>

Term life insurance is simple, straightforward life insurance. You pay an annual premium, and if you die, a

lump sum is paid to your beneficiaries. Term life insurance gets its name because you buy the insurance for

a specific term, such as 5, 10, or 15 years (and sometimes longer). At the end of the term, you can renew

your policy or get a different one. The big benefits of term insurance are that it’s cheap and it’s simple.

<b>Cash Value is Trickier</b>

The other flavor of life insurance is cash-value insurance. Many people are attracted to cash-value insurance

because it supposedly lets them keep some of the premiums they pay over the years. After all, the reasoning

goes, you pay for life insurance for 20, 30, or 40 years, so you might as well get some of the money back.

With cash-value insurance, some of the premium money is kept in an account that is yours to keep or

borrow against.

This sounds great. The only problem is that cash-value insurance usually isn’t a very good investment, even

if you hold the policy for years and years. And it’s a terrible investment if you keep the policy for only a

year or two. What’s more, to really analyze a cash-value insurance policy, you need to perform a very

sophisticated financial analysis. And this is, in fact, the major problem with cash-value life insurance.

While perhaps a handful of good cash-value insurance policies are available, many— perhaps most—are

terrible investments. And to tell the good from the bad, you need a computer and the financial skills to

perform something called discounted cash-flow analysis. If you do think you need cash-value insurance, it

probably makes sense to have a financial planner perform this analysis for you. Obviously, this financial

planner should be a different person from the insurance agent selling you the policy.

What’s the bottom line? Cash-value insurance is much too complex a financial product for most people to

deal with. Note, too, that any investment option that’s tax-deductible—such as a 401(k), a 401(b), a

deductible IRA, a SEP/IRA, or a Keogh plan—is always a better investment than the investment portion of a

cash-value policy. For these two reasons, I strongly encourage you to simplify your financial affairs and

increase your net worth by sticking with tax-deductible investments.

If you do decide to follow my advice and choose a term life insurance policy, be sure that your policy is

non-cancelable and renewable. You want a policy that cannot be canceled under any circumstances,

including poor health. (You have no way of knowing what your health will be like ten years from now.) And

you want to be able to renew the policy even if your health deteriorates. (You don’t want to go through a

medical review each time a term is up and you need to renew.)

term life insurance rates