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Ask Dave

Why Does Dave Like Term Insurance?

Dave has a reason for recommending term life insurance, and he details it here.

QUESTION: Breck on Twitter wants Dave to explain how term life insurance works at the 15-year and 20-year level, and why Dave likes it so much.

ANSWER: There are a couple of parts to that discussion. Term life insurance versus a cash value policy is no comparison. Term life has no savings plan built into it and the others do, but the others are more expensive.

If you take a 30-year old who buys $125,000 in cash value life insurance, he’ll pay $145 a month for it. Built into that is a savings program called cash value that builds up over the years. By the time he’s 50, he’d have $27,000 of cash value built up in there. If instead he bought a $400,000 term life insurance for $10 and invest that difference of $135, he’d have $133,000 in a good growth-stock mutual fund.

That’s not even the big problem. The big problem is that, when you die with the savings insurance, they keep your money. They will give your beneficiary the check for the face value and keep the savings for themselves. Cash value is the biggest middle-class ripoff with the exception of maybe the car lease and the credit card. You could put your money in a fruit jar and it would do better than this insurance!

You buy the term life insurance based on how long you need it. In 15 or 20 years you will have a paid-for house, kids that are not living at home anymore and lots of money built up in your 401k. Buy inexpensive term life insurance and invest elsewhere.