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whole life insurance

cemetaryWhen I published my financial network map I didn’t think that 1.) people would associate my blow money as being money for blow, and 2.) that people wouldn’t know what Equity Indexed Universal Life insurance was.  This is kind of a sore spot for me because I have been a believer in term life insurance due to the vast difference in the cost of the insurance. I signed on to this whole life insurance policy back when I was not really involved my my families finances, my wife was in control and being led by her mom who is in the financial planning business.  I was more than happy to allow others to influence my decisions and now I am trying to figure out what it was that I signed up for.

What it is

EIUL is a form of whole life insurance which includes an investment portion where your earnings are tied to a market index. I use the term tied very loosely. This is not a true index fund like you would find at Vanguard or Fidelity but just tied to the fluctuations in the market and in no way actually invests in any stock or equity investments.

The Guarantee

You cannot lose money with the policy, except the money you pay for the insurance, but you could possibly not make much either. The cost for the insurance is pretty steep, I still haven’t quite figured out how much of the $300.00 per month I pay goes towards the actual cost of the insurance.  You are charged a decreasing surrender fee for the first 7 years so there is a good chance you wouldn’t be able to get anything out of it if you were to give up on the idea, this is where I am.

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padlockSelf Insurance, defined as the accumulation of cash reserves to guard against future losses as opposed to purchasing insurance.  This is where many people advocate Term Life Insurance over whole life insurance or even not insuring your home because you have sufficient cash to replace it. The thought being that you should have amassed a sufficient amount of wealth by the time your term life policy expires that your family would be able to survive with just the money you have accumulated.

People take the concept of self insurance to apply to any situation, probably the most used would be picking up liability only insurance on your vehicle. Essentially you are assuming all risk associated with the value of your vehicle.  To truly be self insured you would have to have a sufficient amount of cash on hand to replace your vehicle.  Most people don’t bother or the value of the vehicle is $2k or less.

Lets assume you have a $10k vehicle and are self insuring. This means you need to have $10k on hand to replace the vehicle. You can’t put this money at risk or tie it up in income producing assets so you are essentially just sitting on money that could be put to better use.  By deciding to self insure your are essentially taking a portion of your investments and freezing them, preventing them from producing additional income. So if you wreck your $10k car you use $10k to replace it and then set aside, if you have it, an additional $10k to insure the new vehicle. In all you are now out $20k that you could have otherwise invested to earn you a return on your money.

Most people don’t look past the obvious, you have $10k and your car is worth $10k, odds are you can put your $10k to work harder than the cost of modest comprehensive coverage with a deductible.  The deductible is the key, you obviously can afford a higher deductible so you should do that but not eliminate total coverage. Let your money work for you, don’t let it sit there and collect dust. The only exception I could see is with life insurance when you are already living off your stored cash.

Even with life insurance though you run the risk of getting cancer or some other fatal disease, which would prevent you from renewing term insurance and drain your cash reserves.  I know most people will disagree with me and I probably did not make my point as well as I could have. Let me know what you think, do you totally disagree? Leave a comment lets get a good healthy conversation going.

Photo: (clspeace)

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