Insurance companies often recruit young unemployed business and accounting majors to work as life insurance salespeople. As some of your non military peers know, when you are sitting on student loan debt there are very few things you wont do to make ends meet. They work solely on commission and after a brief training period they are sent out to try and sell life insurance to the people they know. We would wager that if you haven’t already been contacted by someone you know about life insurance, you will be, and before you go into that conversation you better know what product your friend is trying to sell you. Life insurance is a product that is marketed heavily, but is often misunderstood. Here’s what you need to know about it.
2. What is life insurance, and why you may or may not need it
Life insurance is a financial product that many people in early adulthood don’t feel they need, although life insurance companies are eager to sell it to us. Its real purpose is to protect your family and dependents against the loss of your income in case of your death. As military members you already have a guaranteed life insurance policy, but that doesn’t mean that a friend won’t try to sell you supplemental coverage. Essentially a life insurance policy provides a sum of money that in the case of your death will be paid to a beneficiary, your spouse or children.
This type of insurance comes in two distinct flavors:
Cash value life insurance:
Cash value life insurance is touted as both a life insurance policy and and investment vehicle, and it is a complete rip off. A cash value life insurance policy has an inflated premium that is split between paying for life insurance and the rest is supposedly invested to help provide for your retirement. The reality is that the returns on a cash value life insurance policy are terrible (they average about 3% annually), because these policies are loaded with commissions and fees that eat into the returns and add to the insurance companies profits. A healthy 30 year old male can buy $125,000 of Cash Value Life insurance for about $100 per month. This may seem reasonable until you compare this cost to the cost of a similar $125,000 term life insurance policy (discussed below).
There is no one, ever, who needs to purchase cash value. Especially young adults. Take the money you would have spent on a cash value policy and invest it yourself and take your investing future into your own hands. Unfortunately a friend who tries to sell you life insurance will often try to sell you a cash value policy, because they make a much better commission off your policy. Just say no — don’t be afraid to be direct. You don’t have to do your friend a favor by buying this type of policy.
Fortunately there is an alternative to cash value life insurance, it is a smoking deal and depending upon your circumstance can be a valuable asset.
Term life insurance:
If you have dependents (kids or other family members) who would need your income to be replaced in the case of your death, you absolutely should invest in a term life insurance policy. Term life insurance has a time frame associated with its benefits (that’s where the term comes from). This length is usually about 20 years. In the case of your death the face value of the policy would be paid to the beneficiary you chose for the stated amount of time. This will help your spouse until kids are out of the house or help other dependents manage until they can readjust to life without your income.
A healthy 30 year old male can buy a 20 year $125,000 term life insurance policy for around $7 per month, a $93 monthly savings over a similar cash value policy. That $93 isn’t invested for you like a Cash Value plan. However, if you wanted you could take that $93 and invest it each month in a good mutual fund earning about 9% (the stock market average). At the end of those 20 years you will have over $62,000. A cash value life insurance policy won’t get you even close to this type of return.
3. If you buy life insurance, always choose term
Term life insurance is a great product, and if you have dependents you should definitely invest in a policy. Plus if you have a friend who happens to sell life insurance they can sell you a term policy. They won’t make very much commission off your policy but you will have gotten a great product and been able to help a friend.
What have been your experiences with friends trying to sell you life insurance? Do you have any advice or suggestions about how to graciously interact with that friend? Tell us about it.