The following story was donated to us by a regular visitor to the FedPrimeRate.com
website:
"Back in June of 2003, Lauren, my baby girl, had just celebrated
her first birthday. It was a wonderful and happy time for me, but the
milestone also prompted me to think about Lauren's future. If anything
happened to me, I realized that my daughter was not protected. I did
not have a crazy lifestyle marked by dangerous behaviors and/or reckless
risk taking. But, one can never know how one will meet one's end. I
was cycling a lot back then, and there would be times when a car would
zoom by me on the road, moving way too fast and passing way too close
to me. I was very much aware that one unlucky encounter with a careless
or drunk driver could send me to my maker, in the blink of an eye.
Lauren's mother worked a full-time job, and made a decent living,
but she was not smart with her money: she had no retirement savings
and no idea how she and my daughter would survive if I suddenly died.
I started to do a good deal of research into life insurance. I had
always heard that for a typical, middle-class family, a term life insurance
policy was the way to go, but I had my doubts. Bottom line: paying premiums
for years was something I would have to do no matter what type of policy
I chose, but with a term life insurance policy, coverage would end when
I reached a certain age. To me, term life didn't seem like a wise choice.
I imagined myself paying a premium for 30 years, then dropping dead
from a heart attack the day after the policy expired.
I spoke to Rick, a sales rep' at a large, financially sound and well
known insurance company. I explained to him that I was new to life insurance
and needed some guidance. Rick was very knowledgeable and friendly,
and even offered to drive out to my townhouse so that he could sit down
with me and explain my options. I took him up on his offer.
Rick stopped by the next day with a portfolio full of documents. I
had questions, and he answered all of them. He then presented me with
a few options:
- A permanent or whole life insurance policy. This type of life
insurance would cover me during my entire life, even if I lived
to be 150 years old. I would pay a premium until I reached either
65 or 90, depending on the specific policy I chose. The policy would
build a cash value over time, which means I could have access to
cash in the future if I needed it for an emergency or a business
opportunity. This type of policy sounded great to me, but it had
one major catch: permanent policies are very expensive. I
could not afford the premiums, so this option was out.
- Rick then explained that he could sell me a term life insurance
policy, which would be the most affordable option, but he said I
wouldn't be happy with it, since he knew from our previous conversation
that I wanted a policy that wouldn't expire.
- Rick then explained that he could put together a custom policy
for me, a hybrid policy that would offer the affordability of a
term policy with the lifelong coverage of a permanent policy. He
called this a compLife policy. He said that this type of policy
would be a perfect for my situation. The death benefit would never
go away, the policy would build a cash value over time and the premiums
were reasonable.
I told Rick how much death benefit I wanted the hybrid policy to payout
when I died, and he said he would have a proposal ready for me the next
day.
Rick returned to my home the next day with a proposal and we went over
the details. The premium of the hybrid policy he presented me was so
reasonable that I decided to purchase a policy for my daughter as well.
Rick explained that buying a policy for my daughter while she was a
toddler would make it much easier and much more affordable for her to
have a high quality life insurance policy when she became an adult.
I tried to convince the mother of my child to get a similar policy,
but she refused. She said it would be pointless since she already had
a policy through her employer. I looked over the details of her policy
and found that her death benefit was a mere $40,000. I tried to make
her understand that the benefit was way too small, but she wouldn't
listen.
So I ended up with a hybrid policy for myself and a policy for my daughter.
A few days after I signed on the dotted line, a lady, who I assumed
was an independent paramedical hired by the insurance company, visited
my home to take a blood sample (thankfully, she was good with needles!)
and perform a few other tests (blood pressure, pulse, etc.) She also
asked a number of health-related questions like "do you now, or
have you ever in the past, smoked cigarettes?" and "do you
take any medications on a regular basis?" and "how often do
you exercise each week?" I didn't mind the exam, since it was essentially
a medical checkup in the comfort and privacy of my own home. The health
screening included an HIV test, which is something I like to do as often
as possible anyway.
Fast forward to 2008. Having learned a great deal about insurance since
2003, and having performed my own crunching of the numbers, factoring
in things like inflation and conservative estimates of my projected
earnings, I realized that I should have just bought a term life insurance
policy with a generous death benefit, and put the cash I would have
saved into my business and my Roth IRA.
Since 2004, I had been making most of my money from banks, and the
credit crisis which peaked during the fall of 2008 left me financially
vulnerable. I cashed out of my hybrid policy in December 2008 (insurance
folks call this surrendering a policy), and used the money as a buffer
or cushion while I retooled and reorganized my business. It was the
right move. I'll be purchasing a term policy just as soon as my income
is back to 2006-2007 levels.
The mother of my child did not care that I had terminated my life insurance
coverage. I don't mean to be negative, but here's what she actually
said to me: "I don't care about your life insurance, because the
beneficiary isn't me." My sister was the beneficiary of the policy,
because I knew that if something happened to me, the hundreds of thousands
of tax-free dollars the policy would payout would be much better managed
by my sister. I was 100% confident that my sister would take care of
my daughter if anything happened to me. The mother of my child, on the
other hand, would have spent it on cars, clothes and lavish vacations.
Again, I am not trying to be negative, just honest.
I think -- and I'm basing this on my years of research -- a permanent
or whole life policy is a good fit for wealthy, tax-savvy individuals
who want to pass a certain amount of wealth onto their kids. But for
everyone else, I think a term life policy is invariably the correct
choice. I now believe that it's not wise to assume that your children
are going to have a need to inherit a half a million dollars or more
when they are grown up and working. My daughter will inherit some money
and perhaps a business or two when I am gone, and, in my opinion, that's
enough. For me, the bottom line is quite simple: life insurance is and
excellent way to ensure that your kids will be OK if something happens
to you before they reach an age where they can take care of themselves.
Thanks for reading, and thanks for the great website."
