10 Things You Need to Know About Life Insurance
Not long ago, I received a message from one of my readers that sent a chill down my spine.
Dear Mary: Recently I switched my life insurance from term to whole life. Now I am not sure I made the right choice. Which one is better? I am in my early 60s.
With so little to go on, I had to read between the lines. Here’s what I came up with. This reader had a term life insurance policy. Someone and I am going to assume it was an insurance salesman, approached her with unsolicited advice to switch to a whole life policy. Given her question, “Which one is better,” together with her admission, “I am not sure I made the right choice,” I do not believe this was her idea.
Given no information to the contrary, I am convinced she had no idea what she was doing. Whoever advised her did not educate her to the level that she would be able to make her own informed decision—one that she would not doubt as soon as she’d written the check and the salesman was long gone.
I responded privately to the reader, and as yet have not heard back. In the meantime, I have compiled this list of things everyone—regardless of age—needs to know about life insurance, in my opinion.
1. All life insurance policies fall into one of two categories
Term insurance is pure life insurance coverage. If you die with the policy in force, it pays out the face value to your beneficiary. Whole life policies (there are many varieties) combine an investment product with pure term insurance and these policies build cash value.
2. Insurance is sold, rarely bought
By this, I mean that insurance—especially whole life insurance—is rarely something a person goes out and shops for. Agents sell the vast majority of whole life policies because the life insurance industry has a vested interest in pushing this high-commission (and high-profit) type of life insurance to unsuspecting and uninformed suspects. In my opinion, insurance agents walk a thin line when they wear two hats—teacher and salesperson. This creates a conflict of interest. The way to beat this is to never purchase insurance from the same person who advises you on the type and amount you should have. Educate yourself first, then contact an insurance company.
3. Whole life insurance is expensive
Policies that include an investment component cost many times more than term policies. As a result, many people who buy whole life often can’t afford an adequate face value, leaving themselves underinsured.
4. Whole life policies are built on assumptions
The returns quoted by agents are guesses―not reality. Most guess to the high side to attract more buyers.
5. Keep your investments and insurance completely separate
There are better places to invest that don’t come with the very high commissions of whole-life policies. Stick with inexpensive term insurance.
6. Buy enough term coverage to fill your needs
Life insurance is no place to skimp, especially with rates at historic lows. A good rule of thumb is 8 to 10 times the annual gross income of the primary breadwinner in the family, and 5 to 8 times for the secondary earner.
7. Match the term of the policy to your needs
You want the policy to last as long as it takes for your dependents to leave the nest or for your retirement income to kick in.
8. Buy when you’re healthy
Older people and those not in the best of health pay steeply higher rates for life insurance. Buy as early as you can, but don’t buy until you have dependents—these are people who would become financially destitute without the support from your income. That alone is the purpose of life insurance.
9. Tell the truth
There’s no sense in exaggerating facts on your application in order to get a lower rate. Insurance companies always investigate before paying out on claims. You will not get away with fudging the facts.
10. Shop online
Buying life insurance has never been easier, thanks to the Internet. Once you know the type of insurance you want and the amount you need, you can get tons of quotes right online and avoid pushy salespeople. Just know exactly what you want and how much you need before you ask for quotes. Then stick to your guns.
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Thanks Mary; you made that so clear and I now know that I do not need life insurance. Should I do a pre-pay on funeral arrangements; since that is the only reason I can think of for my children to be burdened with if I die?
Prepaying your final arrangements is certainly an option. Or open a joint account for those funds with your chosen executor or family members(s).
Hi Mary! Could you please expand on #7 a little (7. Match the term of the policy to your needs
You want the policy to last as long as it takes for your dependents to leave the nest or for your retirement income to kick in.) I have no dependents, but I still have term life insurance (to pay off my house if I die before it’s paid off). Other than my house, I have no debt. Thanks!
Hi Lucy: There is only one reason to carry life insurance and here it is: To replace your income for those whose livelihood would disappear upon your death. Specifically, that would be minor children, a spouse who depends on your income, perhaps elderly parents you support financially who are so dependent that without your financial support and would become financially destitute if that income were to disappear. Given you have no dependents who depend on your income for their livelihood, I see no reason for you to have life insurance. And unless the policy is actually “mortgage insurance” required by the mortgage holder where it is the beneficiary of that policy should you die before the mortgage loan is paid off, in my opinion, that is not a good reason for you to carry life insurance, either.
Thanks Mary! We bought term life insurance in our late 20’s and it will expire (what is the right word?) in a decade or so when we are in our 50’s. What then? Should we wait until then and purchase a new term policy or purchase a longer policy now when we are a little younger?
Have you determined why you will need life insurance after this policy expires? It sounds to me as if you purchased that policy to cover the years you have minor children and perhaps a double income—both spouses working. It makes sense to carry life insurance then as losing one of those incomes permanently could throw a family into quite a financial tailspin. I can’t really advise you beyond that as I have no specifics about your situation, nor am I licensed to give specific financial advice. But you can learn so much through your own independent research. Just make sure you are learning from someone who will NOT benefit financially should you act on his or her advice. Learn, determine your need and then go shopping.