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Strategies for buying life insurance
Getting the right life insurance policy at the right price can be incredibly easy or very difficult.
Life insurance is a highly competitive business, in which the salesforce depends almost entirely on commissions.
Insurance companies pay fat commissions for selling whole-life policies; perhaps 80% of your first year's premium goes to the agent. Commissions for selling term-life policies amount to roughly the same percentage of first-year premiums. But since whole-life premiums are much higher than premiums for term-life policies with the same death benefit -- they can be five to ten times more -- agents make much more money selling a whole-life policy than they do selling a term policy.
It's no wonder, then, that agents push whole-life policies as if their livelihoods depend on it, because, well, they do. If whole-life policies were beneficial to consumers, our story would end here. The fact is the vast majority of those who need insurance should buy term.
Today, the annual premium on a $500,000 term policy for a healthy, nonsmoking 40-year-old male might be about $500. The same policy for a healthy woman, aged 30, might cost about $260 annually.
Not long ago you couldn't buy term policies with level premiums for periods of more than 10 or 15 years. Today you can easily find 20- and 30-year term policies.
Agents will argue that whole-life policies are superior because you can keep them the rest of your life and build up cash in them tax-free, which can then be borrowed.
That's true, but they don't tell you about the high fees and commissions built into whole life as well as surrender charges (if you want to cancel the policy) that often leave you with little or no cash value five and even 10 or 15 years after you take out the policy.
The point of a tax-free buildup of cash just isn't that powerful anymore, given the proliferation of IRAs, 401(k)s, and other tax-advantaged savings vehicles that have tiny commissions, much higher yields and complete portability.
So stick with term, and do your investing elsewhere.