Talk about an unpleasant expense: Life insurance is something you pay a lot for, then never get to use.
Life insurance is probably one of the least understood major expenses. Many people buy it when they don’t need it. Just as many need it and don’t buy it. And many more don’t have it and don’t need it, but they allow salespeople or family members make them feel guilty for foregoing it.
Check out the following video, then read on for more details…
As I said in the video, you need life insurance if those you leave behind will suffer financially from your death. This is typical when you have kids, debt, and a one-earner household – that’s when losing a breadwinner can be tragic. When you’ve paid off the house, the kids are gone, the savings account is topped off, and your death is just an excuse for your remaining friends to get together and have a drink, your need for life insurance is over.
Tips to save…
Many sites, including this one, have insurance search tools that can help you compare quotes and features. But remember that no online insurance search engine – including ours – includes all companies.
Search tools are a great way to make sure what you have now is still a good deal. But if you’re buying your first policy, or know you’re going to replace existing coverage, more due diligence is in order. Check several search sites and beat the local bushes as well.
2. Buy term
There are two basic classes of life insurance:
Permanent, or whole life: As the name implies, these policies offer a lifetime of coverage. They also combine a savings account and life insurance contract, allowing you to tap the savings component, known as cash value, should the need arise.
Term insurance, on the other hand, has no cash value and covers you for a specific period of time, from one year to 20 or more. If you die during that term covered, your beneficiaries get a check. If not, you’re out the premiums.
While permanent sounds like a no-brainer, most people should buy term. The reason is simple – term is much cheaper. In addition, you usually need insurance most when you’re younger, in debt, and raising a family. As you age, pay off the mortgage, and no longer have people depending on your income, the need for insurance withers. Which is good, becasue the older you get, the more insurance costs.
Be aware that many insurance agents and some financial advisers will give you the opposite advice: They believe the forced savings offered by a whole life policy are worth the extra cost. But most objective advisers will tell you to buy term and use the difference in price to invest on your own.
The longer the term you buy, the less it will cost per year. In other words, you’re better off getting a 20-year-level premium policy than one that renews every two years. In an ideal scenario you’ll pick a term that matches your need for insurance.
3. Don’t buy more than you need
As someone who sold life insurance back in my stockbroker days, I can assure you that fear is often an integral part of the sales process. In addition, the insurance salesman (or online calculator) makes assumptions that may not accurately reflect your financial need.
For example, many salespeople will simply say to multiply your annual salary by seven. Many calculators don’t take Social Security survivor benefits into account. They might also assume you want a benefit big enough so your spouse and children can live forever off the interest alone. Or that your kids plan on attending Harvard. Or that your mortgage balance isn’t decreasing with every payment you make.
How much insurance you need isn’t an exact science. Maybe you want to leave your survivors wealthy, or maybe you just want to leave enough to pay for your funeral. But if you leave it up to a company-sponsored calculator or salesperson, expect a big death benefit – and a big premium to go with it.
Better idea? Figure out what your death would mean financially to your family and determine their needs, both short-term (paying for your funeral) and long-term (paying off the mortgage and college costs). When you’ve arrived at an estimate, subtract the money you have now or can expect from Social Security or work-related policies, then cover the shortfall with insurance.
4. Stay away from commissioned salespeople
Woody Allen once said, “There are worse things in life than death. Have you ever spent an evening with an insurance salesman?”
While Allen was probably referring to boredom, he could have been highlighting another drawback of commissioned salespeople. Simply put, the more you buy, the more they make.
But avoiding commissions doesn’t mean avoiding expert help. There are plenty of fee-only planners out there that can help you evaluate your need, then steer you to low and no-commission policies, like those from TIAA-CREF and Ameritas. Sure, you’ll have to pay for the adviser’s time, but you’ll probably offset the cost with less expensive insurance.
5. Avoid guaranteed issue (if you can)
Ever see a TV commercial – usually directed at older folks – offering insurance with no medical exam and insisting “you can’t be turned down”? That’s guaranteed-issue life insurance. It doesn’t take a rocket scientist to figure the angle: The death benefit is so low, the first few years of premiums may add up to more than your beneficiaries will receive.
Avoiding a physical sounds convenient, but you’ll probably get a better deal by submitting to one, even if you’re not in the best of health. If you know for a fact that you’re uninsurable, you may not have a choice. But if you have alternatives, explore them first.
6. Stay on top of it
While health issues will make your insurance more expensive, getting healthier can mean savings. If you quit smoking, lose weight, or make other life changes that lower the risk for the insurance company, don’t be afraid to contact them and ask for a reconsideration. But be prepared to provide proof, such as an extensive medical history, to get a lower rate.
Health isn’t the only thing that can lead to changes in your policy and premium. Have a new baby? You might need more insurance. Pay off the mortgage? Might need less. Periodically re-evaluate your coverage needs and costs.
If you need to increase your coverage, you may be able to do so less expensively by buying a rider (an addition to an existing policy) rather than taking out a new policy.
7. Pay annually
As with most kinds of insurance, companies often charge a little more if you pay premiums monthly rather than annually. You should also ask about discounts for allowing the company to tap your bank account and collect their money automatically.
8. Don’t buy it on kids
Unless your child is contributing financially to your family, you don’t need to insure their life.
As with the whole life-versus-term argument, this is advice not fully embraced by everyone. There are those who insist buying a permanent policy for infants is a good idea, for three reasons:
- If they should later develop a health condition that renders them uninsurable, at least they’ll have some coverage.
- Although it’s certainly more rare than with seniors, children die.
- They’ll establish a permanent savings account.
While these are valid arguments, they’re not enough to convince me – or most financial advisers. Sure, children can develop a health issue rendering them uninsurable, and they can die. But it’s not likely enough to pay for protection, especially for the high-cost kind that accompanies many whole-life policies. A savings account for kids is a great idea, but again, there are lower-cost ways of going about it.
Bottom line? You don’t have to be an expert to know whether you need life insurance – you just need an imagination. If insurance is important, do some reading, do some shopping and take action. If you need help, find it. But don’t rely entirely on online calculators or commissioned salespeople.
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