Buying Life Insurance Basics

 

We buy all sorts of products. The product is created, marketed and described to entice your senses into making you believe that you need it. Part of the reason is because we as humans need instant gratification. We buy something, its tangible, in front of us to use show or give away. Now imagine buying something and having nothing tangible to show for it. Buying life insurance is somewhat like that. A lot of people resist buying life insurance because it doesn’t meet the gratification requirement. Furthermore, having to think about death is really not a favorite topic. No one wants to think about dying. No one wants to deal with it right now for it may not happen any time soon. Seems logical enough.

 

A Life Insurance Agent

My father was a life insurance agent for most of his life, he is now retired. He started out in the insurance business in his early 20’s when door to door sales were the rage. He quickly made top salesman and promotions rapidly followed . I have sometimes imagined him with a neatly pressed dark suit and black shoes, suit case in hand knocking on neighbors doors. He was soon promoted and became a general agent and throughout his 40 year career worked for several top rated life insurance companies . At some point he no longer sold life insurance as much as he recruited and trained others to do so. For him it was an exciting job. He opened offices within the US and Central America and traveled more than he ever dreamed possible. His salary was very decent. He managed to put 6 of us kids through private school. We moved frequently , every two years or so. Other times he opted to travel by himself without having to uproot the family once again and would spend two or three weeks away at a time.

Lucky for me growing up, I not only got to travel every few years but at an early age already knew and understood the basic concept of life insurance. You’re not buying anything tangible for yourself or anything you will benefit from. The sales pitch is “You are buying peace of mind“. In the event some tragedy or illness befalls you, you will know your family will be able to continue without you being around to financially support them.

For most people life insurance is not a necessity until they get married and start a family. Sometimes they become ready to buy life insurance at the turn of some life changing event. Buying life insurance can be a little overwhelming and the amount of information out there seem to require a masters degree to sort out.

In lay man terms I will explain the basics. If you take the time to understand you will make a better informed decision that could end up saving you when that life insurance agent comes calling on you.

The Three Basic Questions

 

1.Who would the beneficiary be ? A beneficiary is the person or persons that will receive the benefit from your policy.

2. How much coverage do you need ? . A simple formula is to multiply you salary x 8.

3.What type of policy do you need ? Term life insurance or permanent life insurance.

Term Life

Term life insurance is a policy purchased for a determined period of time. They are inexpensive and are sold as 5 year policies which can be renewed in 5 year increments up to 30 years. If you should die within the policy period your beneficiary will be paid, if the policy expires before you do then there is no payout, it simply expires. This policy is used not so much for protecting your family against financial hardship as it is for a specific goal. For example you may want coverage until your children reach a certain age and are done with school or until your mortgage, personal or business loan is paid in full.

Permanent Insurance and Types

Permanent insurance is what most of us seek, a lifetime policy, one that does not expire nor needs to be renewed. It is also known as a Cash Value Policy because it has an additional feature that acts somewhat like a savings account and increases the value of your policy over time. From every payment made a little goes into a forced savings account that the insurance company invests for you. How that cash value is invested is the difference between the three variations of the permanent life insurance policies.

There are three variations of permanent life insurance . There is whole life, universal life, and variable life .

  • Whole life is the most popular and common policy. With this type of policy your premiums and the death benefit you apply for will remain the same throughout the life of the policy until it is paid out. The insurance company totally controls how the cash value is invested.
  • Universal life is less strict than whole life when it comes to reinvesting the cash value portion of the policy. It allows you to adjust your premiums and death benefits throughout the life of the policy. It’s a little like playing the stock market in that it is dependent on the economy and the fluctuating interest rates.
  • Variable insurance is pretty much for the absolute investor. It is dependent on your ability to invest the cash value successfully in either stocks, bonds or money market funds. Its a bit intricate for most of us but it does have tax advantages for those interested.

Other Information to Consider

 

Of course this is a very simplistic view, but its all most of us need to know. For in depth explanations of each you can look up numerous insurer websites to find out what they offer. Life insurance agents will try to bump up their sales comissions by spewing out useless information, and confusing you into purchasing a larger policy. Don’t let this happen to you. Unless you are specific about your needs you run the chance of being wrapped up in coverage you may not really need.

  • When considering a life insurance policy keep in mind that a medical exam will most likely be required.
  • Your needs may change over the years and riders can be added to allow for updated coverage.
  • Cash value builds up and its your money to borrow against , use, or apply towards paying your premiums later on in life.
  • Exclusions for suicide, acts of war and sometimes risky profession and hobbies may apply so make sure to always read your policy.

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