Here’s a few tips to help you make good decisions when buying life insurance.
Life insurance is typically sold. I prefer you to be in the driver’s seat and “buy” life insurance rather than be “sold” life insurance.
These few tips will equip you to make better choices when talking with an insurance agent. And trust me… it’s better to make a good decision about buying life insurance today than to find out later you could have accomplished the same thing for a fraction of the cost.
How much life insurance do you need? This calculation is based on several factors and there’s more than one way to calculate it.
Instead of discussing each approach (not the reason for this post) I’ll direct you a “needs approach” calculator. Click here to access the calculator.
After figuring out how much you need. Now the questions are, “what type of policy do I purchase and where should I buy it?”
There are three major categories of life insurance; Whole Life, Universal Life, and Term and each type can have multiple sub-categories.
The purpose here is not to dive into nuances… that requires a book. I do want to comment on each to help you understand if you’re being “sold” something you really don’t need.
Whole life (WL) is by far the most expensive and pays the highest commissions of the three. The reason, WL is guaranteed and builds cash value (guaranteed as long as you pay premiums and the insurance company does not go belly up).
These guarantees and cash value accumulations features make the premiums extremely high when compared with term policies offering the same death benefit.
Life insurance is not an investment, it’s a risk management tool. You buy life insurance to protect against adverse events. If it’s being sold as an investment, and you buy it, you’re buying it for the wrong reason.
Not everything is negative with WL. Its use is limited in my opinion (a discussion for another day). WL is typically not the best option for basic life insurance coverage.
Universal Life (UL) is similar to WL. The internal mechanisms are not guaranteed the same as WL.
UL has a “projected” cash build up based on non-guaranteed rates of return. Life insurance agents tend to use the non-guaranteed projected cash accumulation as a selling point. This is misleading.
Projecting future rates of return is not possible… unless you can tell the future. When you are told the UL policy has a “projected” cash value of “X” amount 20 or 30 years, just know those figures are totally unreliable.
Many policies sold 20 to 30 years ago not only have much less cash value than projected when originally sold. The policies are lapsing.
A lapsing policy means the cash value did not build up high enough (as proposed) to support the policy in later years, the rate of interest paid by the insurance company is too low, and the internal cost of insurance for the policy is too high and can no longer be supported by the premiums you’re paying.
When this happens your UL life insurance policy will have zero cash value; and worse, your policy will cancel unless you cough up a much higher premium to keep it in force.
The illustrations used to sell UL are overwhelming to an untrained eye and even misleads even the brightest of consumers. What you see in an life insurance illustration is highly unlikely to be what you end up with 20 and 30 years later.
Guarantees have become a more popular selling point used by agents regarding life insurance and other insurance products (think annuities). Newer UL policies offer guaranteed riders to overcome the risk of lapsing, but at a cost.
Warning… any guarantees offered by an insurance company and life insurance agent about their products is only as good as the financial strength and soundness of the life insurance company and are subject to the claims-paying ability of the life insurance company. This means… if the insurance company fails or cannot pay its claims, the guarantees are worthless.
Rating services use letters and numbers to show the quality and strength of a life insurance company. These can be confusing and misleading.
One quick way to see a composite of all the ratings given to a life insurance company is to ask for its Comdex Score.
Comdex is not a rating but a ranking of companies on a scale of 1 to 100 in relation to other insurance companies that are “rated” by rating companies.
Term life insurance is a product where you only pay for the actual coverage and the length of time you need the coverage (it’s like renting). Premiums are the lowest out of the three types discussed and the most affordable.
You can purchase term life insurance coverage for 10, 20, and even 30 years. You are under no obligation to keep it that long. As long as you make the premium payments the insurance company is obligated to cover you for the term of the policy.
Where do I buy life insurance?
I would start with your employer benefits. If you can purchase a large block of insurance through your group plan then do so. It’s typically costs less and may be less of a hassle to acquire.
If you buy term through a company group plan and you terminate employment, you typically cannot take the coverage with you as term insurance. You usually must convert to a more expensive WL or UL product.
If you discover it’s too restrictive, or expensive, to take the company’s group term policy with you when leaving employment, it might be a better option to buy term coverage (or part of it) outside of your employer’s benefits. In this case, you own the policy regardless of your employment circumstances.
You can purchase policies online or from an insurance agent. Make sure to get quotes… multiple quotes.
Life insurance pricing over the last many years has become highly competitive. Rates have dropped resulting in lower premiums to consumers.
Quotes can be misleading. An insurance quote is like an estimate of premiums, not an official offer.
Until you go through underwriting, an official offer is not given. The premium quoted for “X” amount of insurance coverage might actually be higher after you go through underwriting.
Several factors affect underwriting decisions; height, weight, medical history, vital signs, as well as family medical history.
A good agent helps control this expectation.
Are the premiums guaranteed for the term of the policy? Term policies last for a set period of time (e.g., 5, 10, 20, and 30 years). Some Term policies allow the insurance company the right to increase premiums up to a certain level after you purchase it.
The insurance company reserve these “rights” for themselves and are typically used to manage adverse conditions. Example: an insurance company experiences a higher than normal loss scenario… way more people die than expected.
The insurance company can raise premiums within the guidelines of the contract.
In general, term life insurance is sufficient for your life insurance needs.
Each individual and family is different and permanent products (WL or UL) might better serves their needs.
Don’t buy a life insurance policy because of some illustrated future cash accumulation. Buy it because your family needs the death benefit.