Life insurance as part of an overall financial portfolio is rife with mythology and misinformation. In this article, I will address some of the myths that continue to circulate and provide useful information to help consumers make some rational decisions on the purchase of this important personal asset.
In an earlier article (“Why Buying Term and Investing the Difference is One Big FAIL!”), I discussed why buying term insurance and investing the difference is generally inferior to simply buying a cash value life insurance product. For the vast majority of people, buying term and spending the difference is the default, meaning that the theory of building greater wealth through a systematic investment program rarely materializes. Further, term policies can get painfully expensive in middle age, resulting in people dropping their policies, or, if they purchased a level term product for a long period, say 10 to 20 years, they may find their health will make them uninsurable or the cost beyond their means when the time comes to replace the expired policy. And they often find that the returns on the investment portion of their portfolio do not come close to equaling the life insurance coverage they need.
The second issue deals with taxes: the “invest the difference” part of the equation will almost invariably have tax consequences: unrealized capital gains and dividends for non-retirement investment accounts will result in a tax bill. What that means is that, as the fund manager buys and sells stocks for the portfolio, the capital gains on those transactions result in a tax liability. Similarly, dividends that are reinvested are also taxable. In both cases, you will be getting IRS Form 1099s in the mail around January of each year, which will show the gains and dividends and must be accounted for at tax time. In both cases, you will have no money in your pocket but you will have more in taxes to pay. This effectively lowers your rate of return.
Whole life insurance products don’t have either tax problem: the dividends grow tax-free and the cash value can be paid out later in life on a tax-free basis. And, of course, the death benefit is not subject to income tax if paid out (although it could be subject to estate tax).
I now continue with others myths concerning life insurance. Probably the biggest one is that young, single people don’t need to buy life insurance. This myth developed and has been promulgated by the popular financial services publications because life insurance is supposed to protect survivors’ ability to remain financially solvent in the event a breadwinner dies prematurely. Therefore, according to this myth, young people, who are typically single, don’t need life insurance.
The fact is, that young, single people will almost invariably get the most preferred premiums: even substantial whole life policies are relatively inexpensive. And because young people are typically in the best health of their lives, they are unwritten at the best rates. As one gets older, the risk of having a rated policy due to health issues increases, which can dramatically increase the cost. In addition the cash value of these policies not have a far larger time horizon to accumulate.
For example, using the projections of a top-rated mutual insurance company, a $500,000 policy at age 21 will have a monthly premium of approximately $320 per month; waiting until age 31, the monthly premium increases to approximately $470 per month, and waiting until age 41 increases the monthly premium to approximately $730 per month, or more than double the premium at age 21.
Here is something for you to consider: what would you do if you hadn’t bought family travel insurance and one of your children fell ill abroad? How about this: what would you do if your luggage was lost en route to your destination and you hadn’t taken out a policy?
As you can see there are some very important reasons why millions of policies are sold every single year. Peace of mind isn’t something you can easily put a price on, but spending a few pounds on the most appropriate policy for your needs is vital if you are serious about having a break free from worry.
“But it won’t happen to me”
Every year there are people who believe they won’t be involved in an accident, or fall ill while they are away. Every year people assume they won’t be affected by lost luggage or stolen valuables – perhaps including their passport. But every year, many thousands of those people are wrong. While the odds are indeed long that you would be the unlucky one involved in one of these situations, it does happen. If those people have the right family travel insurance to cover themselves and every member of their group in the event of problems, at least they know they can make a call and put in a claim.
Costs can spiral
Whatever happens to cause you to wish you had purchased family travel insurance (if you didn’t), the costs can soon start going up when dealing with whatever problem you find yourself with.
Lost luggage may not be the end of the world, but it does mean you will have to fork out to replace all the things that were in those cases when you packed to go away.
The costs go up a lot further if an accident or illness is involved. If you are in a foreign country where people have to pay for medical treatment, you will be expected to pay too. In countries like America the costs can be massive. No policy can mean hugely expensive problems to solve at a time when you really don’t need the extra stress.
As you can see it really doesn’t make any sense not to have the proper family travel insurance policy in place before you leave home. This should cover everyone on the trip, so if you get the right one your entire group will have peace of mind. It also means you don’t have to book a separate policy for each individual.