What You Always Suspected About Life Insurance Fees, Is It True? - 1

April 10, 2008

Has your financial adviser ever recommended you use life insurance as a savings or investment tool to help you accumulate wealth for your future goals? Perhaps you have wondered, is this a cost prohibitive strategy? After all how much of that money is really going to pay for that large death benefit and how much really goes back to you?

Surly all of these fees and charges do add up at the end of the day but there are many things to consider if you want to find accurate answers to these questions. The first thing you have to understand when considering life insurance as an investment tool is there are many ways to structure a life insurance policy. The most common way the typical life insurance agent goes about setting up your plan is to first determine how much life insurance you need. Then he or she tries to calculate, what is the largest amount of insurance they can give you for the smallest amount of money out of your pocket?

When a life insurance policy is structured using that method a good portion of your premium dollars ends up going back to the life insurance company in fees and insurance charges. You will most likely be disappointed in the growth of your cash value.

On the other hand there is an alternative way to structure a life insurance plan that tends to go against the conventional wisdom of trying to get as much death benefit “bang for your buck” as possible. In this alternative scenario the agent or advisor structures the plan to give you the least amount of death benefit that the IRS requires so that you can stuff your plan with the highest allowable amount of cash that the law permits. Why would anyone want less death benefit you ask? Because the lower the death benefit in relation to your premium the less you pay in insurance charges and the more cost effective your plan becomes.

But you are probably wondering why go through all of that trouble to calculate the correct proportions? How does that benefit you? Well, using a properly structured life insurance contract allows you to enjoy certain tax-benefits that are difficult to mimic in other investments. For example not only will the money you put in your life insurance plan grow tax-deferred but if you do this correctly often times you can access this money tax-free.

Click here for part 2 of this article.
By Antonio Filippone