How long do you intend to maintain life insurance coverage?
Life insurance, despite its seemingly complex nature, is a contentious topic. While various types of life insurance policies exist, they can essentially be categorized into two main types: Term Insurance and Whole Life (Cash Value) Insurance. Term Insurance is pure protection that covers you for a specific duration, while Whole Life Insurance combines insurance with a cash value side account. Reports consistently advocate for term insurance as the most cost-effective choice, and this has been the case for quite some time. However, whole life insurance remains the most prevalent option in today’s society.
Which type should we purchase?
Let’s delve into the purpose of life insurance. Once we comprehend the true purpose of insurance, everything else falls into place. The purpose of life insurance is the same as any other form of insurance: to “insure against loss of.” Auto insurance covers your car or someone else’s car in the event of an accident. Homeowners insurance protects against the loss of your home or its contents. Similarly, life insurance is meant to safeguard against the loss of your life. If you had a family, supporting them would be difficult if you passed away. Thus, you purchase life insurance to provide for your family in the event of your demise. Life insurance isn’t designed to make you or your family wealthy or encourage them to harm you. It isn’t intended to help you retire (otherwise, it would be called retirement insurance)!
Life insurance is intended to provide financial support for your loved ones in the event of your death by replacing your income. Nevertheless, some unscrupulous individuals have led us to believe otherwise in order to deceive us and sell various other products to us for profit.
How does life insurance function?
To keep things simple, I’ll provide a straightforward explanation of how life insurance works. Bear in mind that this explanation will be oversimplified due to the complexities involved. This is a simplified example. Suppose you are 31 years old. A typical term life insurance policy for 20 years with a $200,000 coverage would cost around $20 per month. Now, if you wanted to purchase a whole life insurance policy with a $200,000 coverage, it might cost you $100 per month. Instead of charging you the actual cost of $20, you would be overcharged by $80, which would then be placed into a separate account.
This $80 would continue to accumulate in a separate account for you. In general, if you wished to withdraw some of YOUR money from the account, you could do so and repay it with interest. Now, imagine if you gave $80 per month to your bank. If you wanted to withdraw money from your bank account, and they told you that you had to Borrow your own money from them and repay it with interest, you would likely be extremely upset. However, somehow, when it comes to insurance, this is deemed acceptable.
