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How To Become Self Insured

by Don Current on July 29, 2010

Insurance Salesman

Courtesy Butte-Silver Bow Public Library

It seems that whole life policies are a fairly popular option with people. I mean really, who wouldn’t want to actually get some money back after paying for a product for so many years?

The problem is, you’re trying to mix products. You are trying to mix a life insurance product with an investment product. What you end up with is not really accomplishing either very well.

An insurance company recently came to my wife’s place of employment to offer whole life policies to the employees. This gave me an opportunity to do a comparison between what I recommend and what they offer.

First of all, you can’t get enough coverage with their whole life policy. The maximum benefit a 35 year old could get would be about $66,000. If you are the primary bread winner for the family, after paying for all of the funeral expenses, there’s not even enough money left to pay a years worth of the family’s expenses. How do you replace the lost income once that runs out?

I recommend you have a policy worth 10 times the annual income of the insured person. So if they make $50,000/yr, you need a $500,000 policy. The $66,000 offered in whole life doesn’t even come close.

Let’s take a look at the investment side of the plan now. A 35 year old could get a 30 year term life policy for about $19 per month with $75,000 in coverage. The $66,000 in whole life coverage was priced at $65 per month and if you were to cash out that policy at 65 you would get $25,218 per their published schedule.

The difference between the two types of policies amounts to $46 per month. If you were to purchase the 30 yr. term life policy and invest that $46 per month in some mutual funds which were diversified as I would recommend, over time, you should easily average 10% which is what the stock market has averaged over time. Just to be safe though, let’s say you only averaged 8% because the stock market was down when you turned 65. When you turn 65, that $46 per month difference would gain you over $68,000 in funds as opposed to the $25,000 that the whole life policy was offering you. Now at this point, your 30 year term life policy has run out, but you now have $68,000 in investments, so you no longer really need the $75,000 insurance policy. You’ve just built your own insurance policy which will continue to grow!

So there you have it with real numbers. I recommend you get a term life policy for ten times your income and at least $300,000 for a non-employed spouse. In addition, you need to have a regular plan for investing so that when your term life finally expires, you’ll be self insured and won’t have to worry about a life insurance policy any longer.