life insurance concept

12 Things About Life Insurance You’ll Wish You’d Known Sooner

 

life insurance concept

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 (perhaps an adult child or grandchild—someone in the business), 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 that I believe every adult—regardless of age—needs to know about life insurance.

1. Life Insurance Comes in Two Flavors

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. Life insurance sales people are not required to be also financial planners, with initials after their names indicating their professional certifications such as CFP (certified financial planner), chartered financial consultant (ChFC), and so forth. What they sell is built into the policy so it can’t be tailor made to fit your investment needs and desires.

I know what you’re thinking and you’re right. I am not licensed in any of those areas. I write about my opinions and my personal experiences in order to help you research, read, and educate yourself so that you can make your own intelligent decisions. Life insurance is too important for you to allow others to make the decisions for you. Trust me, in my life I’ve made two major life insurance mistakes and blunders. Learn from my mistakes .

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 who approach you to set up and appointment 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 proactively contact a reputable insurance company.

3. Whole Life Insurance is Expensive

Policies that include an investment component—whole life insurance—cost many times more than term policies with the same face value. As a result, many people who buy whole life often cannot afford an adequate face value whole life policy, leaving themselves underinsured—and still uneducated. I’m going to guess that most of those who own whole life policies have no idea how they work, what they have in terms of a financial investment, or even how to find out. What they know is that they made a really cool decision to buy a policy that will someday, maybe in effect pay for itself and at the same time set them up to become wealthy.

4. Whole Life Policies are Built on Assumptions

The returns (benefits) quoted by insurance agents selling whole life insurance policies are guesses―not reality. And most guess to the high side to attract more buyers and improve their commissions.

5. Keep Your Investments and Insurance  Separate

There are better places to invest that don’t come with the very high commissions of whole-life policies. My advice. Buy the most term insurance you can afford. Make investing a separate part of your financial life. Read, research, and learn from the best for where to invest your money for growth and retirement.

6. Buy Enough Term Coverage to Fill your Needs

Term 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 a policy for 5 to 8 times for the secondary earner.

Allow me to illustrate:

Let’s say you and your spouse are in your 30s, have 3 minor children, and two incomes. Tomorrow on the way home from work, the wife and mother in this family is tragically killed in an auto accident. Suddenly, half of the household income disappears, but your bills remain the same.

Immediately you are facing a multitude of end-of-life expenses. You need life insurance proceeds to be  ready and available to cover those costs. But there’s so much more than that! You must continue to work, and your kids need to be cared for. You will have no choice but to hire others to fill in for housekeeping, daycare, food preparation, and so on—everything your spouse did as part of your marriage and family.

Life goes on and I’m talking about current school expenses, sports, lessons, clothing, food, medical care, holidays, vacations, college tuition, and more—for many years until those children are out on their own, there are no others dependent on the insured’s income, Only then does the need for life insurance cease.

I’ve just described in my opinion, the ONLY reason for life insurance: to provide for the financial needs of those who will otherwise be left financially destitute without your income.

7. Match Term to Needs

You want a term life insurance policy in place for as long as it takes for your financial dependents to leave the nest—out on their own ceasing to be your financial dependents—or for your retirement income to kick in. You may not keep the same term policy for the duration, as you should shop it frequently to make sure you’re getting the best rate. It’s easy to cancel term insurance.

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.

11. GoFundMe is Not Life Insurance

You may or may not be familiar with the popular website, GoFundMe.com. Basically it is a website  to fundraise for what you care about, whether you are an individual, group, or organization. Just about anyone can start a fundraiser. Just set your goal, tell your story, and watch the money roll in. Sounds so easy, doesn’t it?

I’ve been watching GoFundMe for quite a while, and am starting to see a pattern. Families, loved ones, friends, and neighbors are using this venue to raise the “much needed” money to pay for burial costs, funerals, medical bills; to set up accounts for minor children. Some even attempt to raise funds for their pets’ medical and end-of-life expenses.

The stories are heart rending—young healthy adults taken at the prime of their lives. Minor children orphaned or suddenly missing their mom or dad. I don’t doubt the authenticity. But I do wonder what those who have been left in bereavement have been thinking. And I’m concerned that sites like GoFundMe have become the new life insurance—and even health insurance—for so many. There is no way that sites like GoFundMe should ever be compared or substituted for authentic, viable, reliable life insurance.

I have no hard evidence to prove what I’ve come to believe, but hear me out: These fundraiser sites provide some kind of fake security for many individuals and families. The message is getting louder and more widespread: If something happens and we nee money in a hurry, GoFundMe will bail me out. Please do not buy into that. If you need life insurance, you must find a way to make sure you are covered.

12. When Necessary, Life Insurance is Not Optional

Times are tough—inflation has ripped through the typical American family like a bulldozer. When you can’t pay all the bills, which do you leave unpaid? It’s usually those that are not urgent—an life insurance premiums often fall into that category. Or in many cases, life insurance seems like such an optional thing when we’re young, healthy, carefree and certain that someday we’ll be able to afford it.

Listen, please! No matter your age, if there are people in your life right now (spouse, minor child, elderly parent) who are dependent on  your income—and if your paychecks were to suddenly disappear, would become financially destitute—life insurance is NOT optional. Think I’m kidding? Prove me wrong. Do this:

For the next year, deposit your entire paycheck into a savings account somewhere. Do Not Touch It. Not a penny. Live as though that income has disappeared. A year from now, send me a message to let me know how that’s worked out.

If indeed you and your dependents did not miss it, great. You now have a new option in life. Quit working! Live it up. Or keep your job and keep stashing your entire paychecks. You’ll be able to retire quite well when you decide you want to do that.

But if I’m right (pretty sure that you know I am), don’t wait. Get your financial house in order starting with term life insurance for the breadwinner(s) in your family.

 

Updated, expanded, republished: 8-31-23


We invite your comments below, however this is not the forum for life insurance professionals to debate, sell and, or advise. Those messages should be directed to mailbag at everydaycheapskate dot com.

 

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18 replies
  1. mark says:

    We bought whole life insuance when we were young. now we are in our 60’s. The insurance co. has sent notices that the policy is now losing value…they needed to increase the price or it will be worthless when one of us dies. They are so confusing to talk to and we have not made any changes. I’m afraid we wont get enough when that time comes. It was sold on the premis that the price will never go up, no one ever said the value would go down. I asked them about the TV adds like Colonial pen(I think) have term policies for cheap…my agent said that is just a scam basically. Any thoughts?

    Reply
  2. Brian says:

    Hi Mary! You mentioned making two major life insurance mistakes. Please help us learn and tell us what those mistakes were, and what you would do differently now that you know better. Thank you! Love your website!

    Reply
  3. Veronica says:

    Hi Mary,

    I’d like to point out one benefit of my Universal Life policy, which builds a cash value like you described for Whole Life. During the crash of 2008, I was laid off and with job prospects slim, I decided to go back to grad school to move into a more age-friendly profession. While in school, I did gig work in my old field, but my income took a huge cut. In talking with my insurance agent, she told me that I could use that cash value to keep up bare-minimum payments to keep the policy in force for my young son. Once I started working full-time again, I resumed payments — at a monthly premium that I was allowed to choose for myself. I bought that policy when I was pregnant and still young and healthy, so my premiums are so low compared with comparable term policies I would be eligible for now. For me, there was such relief and gratitude that this company and this policy enabled me to take a couple years’ time-out from paying premiums, while keeping this policy in force.

    Reply
    • Mary Hunt says:

      Yours is an interesting story, Veronica! However, it is very unique and a situation that the general public should ever look to as a reason to purchase a whole life policy. I stand on this post. Even if you feel you can afford a whole life policy (in your case, “universal”) buy a much cheaper term insurance policy, and then invest the rest.

      Reply
  4. MaryAnn says:

    My only slight change in perspective on term life insurance concerns the untimely death of a spouse. My husband and I have had life insurance since the 80’s when we started our family. Our kids are all grown now and doing fine.
    However, at the age of 66, my husband very suddenly and unexpectedly passed away. Even though we are both retired and taking social security, I think what people don’t realize is that basically our Social Security income was cut in half after my husband died and will never be replaced so our annual income took a huge hit. On top of that, the funeral expenses (definitely unplanned in our 60’s) were almost $18K.
    Although we have retirement savings, I don’t think people realize that, although life insurance is not replacing “earned” income, it does come in very handy in a situation like ours.

    Reply
    • Mary Hunt says:

      Your situation certainly fits the criteria to have life insurance, and outlined in the post. Without his SS income, you would have found yourself yourself financially destitute, and likewise he without your SS income. The test does not preclude that income be “earned” even though I would argue that SS benefits check have been “earned!” They are not a gift… it’s money you earned that has been held and managed by the government. As for insurance money coming in handy, yes that’s true. But at what cost? If the insurance premiums are thousands a year (they certainly can be), saving that money instead of sending it to the insurance company make a lot of sense. Thanks for sharing MaryAnn.

      Reply
    • Mary Hunt says:

      Not sure there are any tax implications, Red. However, you could be sitting on cash value. I suggest you speak with a trusted insurance professional. Also, it’s easy to find out the exact cash value … just call the company. They will tell you how much you would receive in cash should you decide to cash out. You may decide that cash is better served under your management rather than the insurance company’s

      Reply
  5. Denise Claire Cedras says:

    Mary,
    It’s important to read through the fine print on a term policy. I was stunned when I was billed for nearly double the quarterly amount & discovered that in certain years the premium rises! And now that I am looking at retirement within the next year & a limited income, it has risen again. I’ve kept the policy so that my kids will not have to foot the bill for my funeral. I have researched for lower coverage, but at my age a policy for a lower amount is the same or higher cost! than my current coverage. (And, due to life circumstances I do not have a retirement plan or part of a nest egg that I can set aside for the funeral expenses.)

    Reply
  6. Maria L. Bunker says:

    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?

    Reply
    • Mary Hunt says:

      Prepaying your final arrangements is certainly an option. Or open a joint account for those funds with your chosen executor or family members(s).

      Reply
  7. Lucy says:

    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!

    Reply
    • Mary Hunt says:

      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.

      Reply
  8. Joy Thomas says:

    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?

    Reply
    • Mary Hunt says:

      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.

      Reply
    • Mary Hunt says:

      Assuming you have determined you need life insurance, as spelled out in the post, I would be shopping it every year! Compare premiums. Chances are pretty good you can get the same coverage (face value) now for lower premiums.

      Canceling your term policy couldn’t be easier: just stop paying your premium and write a letter or call your insurer to let them know you are canceling the policy. Check the website of your insurer, too — there may be a form there you can fill out to terminate your policy.

      Caution: NEVER cancel any kind of insurance before the replacement policy is in place. Even that means a month of double coverage, never set yourselves up for an insurance gap!

      Reply

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