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We Don't Buy Life Insurance. Someone Sells it to Us.
We Don’t Buy Life Insurance. Someone Sells it to Us.
Most of us in the U.S. don’t want to buy life insurance. We may think about it occasionally but to actually buy it would be proof of our admission of mortality. So life insurance or term insurance is seldom bought. Instead, some persuasive agent or broker or underwriter or insurance salesperson sells it to us.
The insurance industry is complicated, confusing and confounding. And insurance language is sometimes difficult to understand. Let me put that another way. Insurance language is always difficult to understand. For your convenience, I've included translations of various common insurance terms you may hear from your friendly agent / broker / underwriter / nsurance person.
Do you need a life insurance policy? Yes! if you do not want your dependents to suffer because of your early and perhaps unforeseen departure from this planet. Can you get the “straight dope” from your agent/broker/underwriter/insurance salesperson? Probably not. They all seem to have attended the same “Insurance Tactics to Confuse the Applicant and Put a Commission in the Agent’s Pocket Training Seminar.”
So here is your best course of action. Since you need life insurance when other people are dependent on your income – your spouse, your children, and any other dependents – here are two types of insurance to consider: Term Life and Cash Value.
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Term Life vs. Cash Value Insurance
Term Life Insurance provides coverage for a stated time period or term provided you pay the monthly or annual premium to receive a specific amount of life insurance coverage. If the insured person dies, then the beneficiaries collect. An annual renewable term is purchased each year and you don’t have to re-qualify by showing evidence of good health each year.
Term life is probably the simplest form of life insurance that has been developed to provide temporary life insurance protection on a limited budget. Since term insurance can be purchased in large amounts for a relatively small initial premium, it is well suited for short-range goals such as to pay off a loan, or to provide life insurance protection during the child-raising years.
Term life insurance - insurance protection that pays death benefits to survivors but has no cash value buildup.
Cash Value Insurance combines life insurance with an investment portion that builds a cash value. This type of policy may also be called universal life, variable life or whole life insurance. Your premiums pay for the life insurance and a portion of the premium is invested in various high priced investments that should grow over time.
Sounds like a good idea? Maybe, maybe not. These investments are managed by the insurance company who charges fees to your account. If you miss paying a premium, you pay a penalty as explained within the policy. You might think this is the best choice – investing your money and not wasting your premium dollars.
But here’s the caveat. For the same amount of coverage, cash value insurance costs up to ten times more than similar term life insurance, and the fees you pay may be high and not competitive. You will find that insurance agents often push cash value polices which pay them commissions and bonuses. And because of the higher cost you could end up being under insured. When you buy term life, you get more insurance for your beneficiaries for less cost.
Cash value insurance.- life insurance that provides protection as long as premiums are paid and includes a savings feature. Also known as whole life insurance.
You may not need life insurance at this time if you are single with no dependents. Or independently wealthy. Or retired and living off your investments.
The chief beneficiary of life insurance policies for young, single people is the life insurance agent.
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Now how do you calculate the amount of coverage you need?
The reason you are purchasing life insurance is to provide a lump-sum payment that will replace your income when you are no longer here. So what amount of income do you need to replace? Also, are there any outstanding debts to pay? Will there be childcare expenses? Is there a mortgage? Are there other assets? Will there be costs for your children’s continued education? All these factors can influence your insurance coverage.
How long a term should you consider?
Insurance salespeople prefer selling cash value policies you can keep throughout your life. These cash value or whole life policies provide them with hefty fees and commissions. But you may not need life insurance throughout your life. You generally only need life insurance when you have dependents. Now that you know more about Term Life Insurance, here is how to determine the length of your term.
How often do you want your premium to adjust?
The cost of insurance goes up as you get older and your risk of dying increases. Yep, fact of life. You can purchase your term life so your premium adjusts/increases annually, or every 5, 10, 15, or 20 years. The less frequently your premium adjusts, the higher the initial premium will be.
The advantage to locking in to a longer term policy – 15 or 20 years – is you know how much you will be paying over that time. You also require fewer medical evaluations to qualify for the lower rates.
The disadvantage to a longer term policy is you will be paying more in the earlier years than you would on a policy that adjusts more frequently. You may also want to change the amount of insurance you need as your situation changes. A policy with a term of 10 or 15 years may make more sense for you.
Do not buy a life insurance policy without guaranteed renewability – a feature which guarantees a policy cannot be canceled because of poor health. Be sure that your policy also contains guaranteed renewal rates, that is, the premiums you pay each time you renew are guaranteed and outlined term by term in your policy. Ask your agent to do a present value comparison of the total. This figure represents the cost of a policy for the entire term in a single payment today.
Buy Your Insurance When You Are Young and Healthy.
The worst time to buy life insurance is when you need it. Older people and those not in good health pay much higher rates for life insurance, so buy as early as you can once you have dependents.Be truthful. Insurance companies will investigate any claim before paying out so it makes no sense to alter the truth in order to get a lower rate.
Shop Around for the Best Term Life Policy at the Best Rate.
When you search for low-cost term insurance, shop by price and by the company's rating. Several agencies, including Standard & Poor's and A.M. Best, rate insurers on their claims-paying ability. Stick with companies with low prices, the term you want, and a top rating.
Are you a member of any business organization, professional association, or alumni association? You can often find low-cost insurance by inquiring within these organizations. Here are some reputable sites providing online quotations:
Term4Sale.com. Online quotation service does not sell term insurance; it provides unbiased term life insurance comparisons.
Insure.com. Quotes from over 90 companies and detailed information on policies available. The site also supplies ratings for the insurers from major rating agencies such as A.M. Best.
Insweb.com. Provides worksheets and advice, lets you save quotes for later retrieval, and lists 800 phone number.
Accuquote.Com. Independent service with over 1,600 policies in its database. But you need to fill out a lengthy form to get a quote.
Note: Skip Mortgage Insurance. These policies only pay off the balance on your mortgage if you die. The problem with this insurance is you are paying the same premium for a steadily declining amount of coverage, as you pay down your mortgage. Avoid this narrowly-focused policy and get a broader term life policy which will include the mortgage payments in your calculations when determining your coverage.
Insurance Terms Decoded
Actuary – professional who has been trained to apply probability and statistics to the practical problems of insurance and related fields.
Accidental death and dismemberment insurance.- pays the insured in the event of death or loss of limb or eye resulting from an accident.
Adjustable life insurance.- lets the policyholder change the plan of insurance, raise or lower the face amount of the policy, increase or decrease the premium and lengthen or shorten the protection period.
Agent.- a representative of one or more companies who sells insurance.
Broker.- a person who represents insurance buyers, not companies.
Elimination period - period of time before insurance benefits begin.
Endorsement - policy feature that increases the coverage of a standard insurance policy.
Exclusions - specific conditions or circumstances listed in the policy for which the policy will not pay claims or benefits.
Face amount - amount that a life insurance policy will pay at death or when the policy matures.
Free-look period - the time you have to look at a policy and return it to the insurer for a full refund.
Grace period - a period (usually 30 to 31 days) following the premium due date, during which an overdue premium may be paid without penalty. The policy remains in force throughout the period.
Lapsed policy - a policy terminated for non-payment of premiums.
Mutual life insurance company - life insurance company whose board of directors is elected by its policy owners and which generally issues participating policies.
National Association of Insurance Commissioners (NAIC) - national organization of the 50 state insurance commissioners for exchanging ideas, information, and coordinating regulatory activities.
Noncancelable - policy that guarantees the premium will remain the same and the policy stay in force as long as the premium is paid.
Premium - the charge you pay for insurance protection.
Settlement option - one of the several ways, other than immediate payment in a lump sum, in which the insured or beneficiary may choose to have a life insurance policy paid.
Stock life insurance company - life insurance company owned and controlled by stockholders who share in the surplus earnings.
Term rider - term insurance that is added to a whole life policy at the time of purchase or later.
Underwriting - classifying applicants for insurance according to their degrees of insurability so that the appropriate premium rates may be charged.
Universal life insurance - flexible premium life insurance policy where you may change the death benefit from time to time and vary the amount or timing of premium payments. Premiums less expense charges are credited to a policy account from which mortality charges are deducted and to which interest is credited at rates that may change from time to time.
Variable life insurance -life insurance contract under which a portion of the premium is invested in mutual funds. The value of the accumulated funds varies on a daily basis based on the performance of the mutual funds.
Viatical settlement - transaction in which a life insurance policyholder who is terminally ill sells his/her rights to the policy in exchange for immediate payment of a portion of the death benefits.
Source: University of Illinois Extension, Consumer and Family Economics Department
Thought for the day: People who live in glass houses . . . should take out insurance!
© Copyright BJ Rakow 2011. All rights reserved.
B. J. Rakow, Ph.D., Author, "Much of What You Know about Job Search Just Ain't So." This is a serious book about job search written with a light touch.