With cash-value insurance, you buy insurance protection for a specific face amount as well as a savings account with the insurance company. The goal is to build a cash-value that will eventually equal the face amount of the insurance policy by the time you’re 100 years old. As you continue to build up savings inside the insurance policy you’re eventually becoming self-insured. The difference between the face amount and the cash-value amount is called the net amount at risk. The net amount at risk is the amount the insurance company is on the hook for in the event of an untimely death. For example, if you have a cash-value insurance policy with a face amount of $100,000 and a cash-value of $10,000, should something happen to you and you die, the insurance company will cut you a check for $100,000. They keep the $10,000 cash value. Their net amount at risk was $90,000. For this reason in the fact that cash-value insurance is very expensive and the rate of return on the cash value is relatively small in comparison to similar investments, I’m not a fan of cash-value insurance.
There are three types of cash-value insurance: whole-life, universal-life and variable-life insurance. There are various differences between the three. The primary difference is what saving or investment products are being used to build your cash-value.
How much life insurance do you need?
If someone relies on your income or economic value, you should have life insurance that equals 10 to 15 times your annual income. Therefore, someone earning $50,000 per year will need guaranteed-level term insurance with a face amount between $500,000 to $750,000. I generally recommend 20-year guaranteed-level term insurance. However, the term portion of your insurance can coincide with how long it will be before your children are grown and/or how long it will be before your personal savings and other income sources are sufficient to provided for your survivors.
(Mortgage and Money Coach Damon Carr is the owner of ACE Financial Damon can be reached at 412-21-1013.)