Navigating Life Insurance Choices: Investing, Variable Policies, and Financial Growth
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What is the main question about life insurance?
Hey listeners, this is Sean. Please enjoy this episode from our archives. And as you listen, think about what your main money question is right now, this week, today, this hour, this minute. What's the thing that you need help with most immediately? We nerds are here to help you. So send your money questions our way. You can call or text us on the nerd hotline at 901-730-6373. That's 901-730-NERD. Or email us at podcast at nerdwallet.com. All right, here's the episode. Welcome to NerdWallet's Smart Money Podcast, where you send us your money questions and we answer them with the help of our genius nerds. I'm Sean Piles.
And I'm Sarah Rathner. If you have a money question for the nerds, call or text us on the nerd hotline at 901-730-6373. That's 901-730-NERD. Or email us at podcast at nerdwallet.com.
Follow us wherever you get your podcasts. And if you like what you hear, leave us a review and tell your friends. We're back and answering your real world money questions to help you make smarter financial decisions. This episode's question comes from James, who sent us an email. Here it is. Hello, nerds. I got contacted about setting up life insurance as a way of borrowing against myself for investments to grow my money. Besides giving them $10,000 to $20,000 to fund the insurance, what's the scam? I would be borrowing against my own money and paying myself back interest. Is there a downside besides the cash being locked up and the insurance company collecting interest and fees? James.
To help us answer James's question on this episode of the podcast, we are joined by nerd wallet insurance pro Lisa Green. Welcome back to Smart Money, Lisa. Thank you, Sarah and John, for having me.
Insurance can be a complicated and kind of intimidating topic to those who are newer to it. So, Lisa, let's start by setting some foundations. Our listener, James, is interested in life insurance. And broadly, there are two categories of life insurance. term life insurance and permanent life insurance. Can you please start by explaining what each of these is and how they fit into life insurance broadly?
Sure. First of all, all life insurance policies have one thing in common. They are designed to pay out a sum of money to survivors when the insured person dies. Term is the simplest form. It lasts for a specific number of years. If you don't die during those years, the coverage ends and no one gets a payout. You can think of this as similar to having an auto insurance policy for a year. If you don't crash your car, the policy doesn't pay out. Permanent life insurance, on the other hand, is designed to last your entire life. These policies often mature at an advanced age, like 95 or 120. The primary reason to have life insurance is to replace your income if you die. Now, if you're like me, your family relies on your paycheck to pay the bills.
If that paycheck were suddenly gone and you still want your family to have food to eat, clothes to wear, and a home to live in, you'll probably want them to have a payout from your life insurance policy. So a lot of people have a hard time deciding between term and permanent life insurance. Is one generally better for most people than the other? Yes, actually, for most families, term life insurance may be all that you need. Let's say you buy a 30-year term life insurance policy when you're young and starting a family. It's designed to cover you during the working years when you're the primary breadwinner, perhaps. By the time that policy ends, your family may not be relying on your paycheck anymore. Your mortgage is paid off.
Your kids are grown and out on their own. You have some money in the bank. You just don't need life insurance anymore. And when might permanent life insurance be a better idea? In some cases, people do need permanent life insurance. For example, let's say you have a child with a disability who will need financial support even after you're gone. You might want to use life insurance to fund a special needs trust for them, and you might want permanent life insurance for this so that the coverage does not expire in 20 or 30 years. Here's another example. Paying for your funeral would cause financial hardship for your loved ones. You could consider a small permanent life insurance policy that would cover your final expenses.
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