How to Buy Life Insurance (and live to tell about it)

 

Are you considering or being pressured to buy life insurance? Join the crowd. Life insurance is one of the most ubiquitous financial products to ever be sold. While life insurance can be a valuable tool in any financial plan, knowing if you even need it -- along with the right amount and type to buy -- can be challenging. There are questions such as: How do I know if I need life insurance? If so, how much life insurance do I need? What type of policy should I buy? How do I know if I am getting the best value and price for the life insurance I buy?

Purchasing life insurance is often tedious, intimidating and complicated, but it does not have to be that way. The insurance companies may offer multiple confusing policies and throw around mysterious jargon that sounds like a foreign language, but in reality, the concepts are simple. Once you understand the true basics of life insurance, your decision can be straightforward and result in the best buy for you.

 

What you should know about life insurance:

The purpose of life insurance (and, really, its only value) is to offset the economic cost of dying. If you have a spouse or young children who would be faced with financial hardship in the event of your death, life insurance proceeds can solve that problem. If you are a key person or partner in a business, life insurance can help to stabilize the business in the event of your death.

If insurance companies try to convince you that a life insurance policy is anything other than a way to replace your income or long-term economic value to a family or business in the event of your death, they are doing so for their benefit, not yours. No matter how life insurance companies may position it, life insurance is not an investment and is not a way to make money or serve as an effective tax hedge.

There is an uncomplicated way to decide if you even need life insurance. Ask yourself: If I die, will anyone I care about suffer an economic adversity that I want to prevent? If the answer is no, then you don’t need life insurance. If, however, you want to protect others from the potential economic cost of your death, the right type of life insurance is the best way to accomplish that objective.

If you need life insurance, what type should you buy?

Life insurance companies have more confusing policy options than a Chinese restaurant. But when it comes down to it, all insurance companies pine to sell you some form of what they call “whole life” or “permanent insurance.” (Both are subtle marketing terms used to suggest you should buy and keep paying premiums on the policy for your whole life.) This type of policy has been the backbone, bestselling and most profitable product of the life insurance industry for over 150 years. So-called “whole life” may have been a reasonable option in the 20th century, when the consumer had few other financial options, but that is not the case today.

The supposed benefit for the buyer of whole life is that premiums will never rise and, over time, a certain amount of “cash value” will accumulate in the policy. The truth is that whole life is more like an annuity for insurance companies than a benefit for policyholders. What makes the product so profitable for the insurance company is that, when the insured is young (and least likely to die), the premium charged is multiple times higher than the actual cost to provide the promised death benefit. The insurance company invests the excess premium and keeps the profits for itself. Insurance companies know that, by the time the insured ages and is more likely to die, over 97% of the policies will have been canceled with no death benefit paid. That is a good deal, if you are an insurance company but not so good for someone who pays inflated premiums for years and turns out not to need the insurance.

If you do need life insurance, the best way to meet that need is to buy it on a temporary basis for a specific term. For example, your children are not going to be young forever, so why buy life insurance that will last forever? The fact is that your needs will change over time, so you should own insurance that could change as well.

Thus, the most efficient approach to buying life insurance is on a temporary (term) basis. This could be for periods of 5, 10 or 20 years. These policies only pay a death benefit, but they are significantly less expensive than whole life. The term policies can be guaranteed to be renewed (no matter how your health may change) at the end of each period (with slightly increased premiums) until you are well into your 80s. This approach -- at less cost -- allows you to review your life insurance needs at the end of each period and decide if you still need the same amount of coverage.

How To Buy Life Insurance (If You Need It)

Life insurance has become much like a commodity, so you should buy it like a commodity. That is, all policies offered by all companies -- especially the renewable, temporary type -- are essentially identical, so it is best to shop around, compare premiums and buy the cheapest one.

That does not mean you have to take the time to talk with 5 or 10 different companies to shop around. There are any number of websites that have relationships with numerous companies, and these sites can provide a spreadsheet of multiple companies offering totally identical policies. This will allow you to easily compare premiums -- which, surprisingly, will be different. It’s a little like shopping online for the cheapest ticket offered by airlines all going to the same place.

In the end, life insurance can be a simple and survivable process. The key is to make sure that you are in charge -- not the insurance company.

                                                                ###

Bob MacDonald -- Former CEO of ITT Life, founder of LifeUSA, retired chairman and CEO of Allianz Life of North America; author of numerous books on business, management and leadership. bobmac5201@gmail.com 

 

Comments

Post a Comment

Popular posts from this blog

The Dirty Little Secret of Retirement Planning

What is the most difficult challenge you will encounter in retirement? It is the risk of running out of money and not having enough income to live on. Unfortunately, this is not an isolated risk.  After working for decades so you could enjoy decades of not working, what is the first thing that happens the very day you retire? Your income stops. After a career receiving a check every two weeks, you suddenly need to replace that income for your retirement years, no matter how many years that may be.  The truth is you need a plan to meet your income needs in retirement. Fortunately, there is no shortage of banks, investment firms and insurance companies, along with a bevy of financial planners eager and ready to help you create a retirement income plan.   A Dirty Little Secret  Unfortunately, there is a dirty little secret when it comes to retirement planning.  The secret is that even the most forward-looking retirement plans don’t fully protect against the ri...
Read more

Don't Die From Running Out of Money

  Most of us do what we can to lead a long, healthy and happy life. If health issues threaten our longevity, we do all we can to obtain the medical treatment intended to extend life. Of course, no matter how diligent we may be, eventually we will die from something. Among other things, it could be from an accident, heart disease, cancer, cerebrovascular disease or chronic lower respiratory disease. But there is another type of death that we do have the power to stave off till something else gets us. It is a living-death caused by running out of money during retirement and such a circumstance can be almost worse than physical death. Preparing to Extend Life During Retirement Most of us dutifully work at a job for most of our adult lives, all the while dreaming of the time when we can retire. Retirement is envisioned as a laid-back period of life with discarded alarm clocks, loose schedules, leisure travel and the freedom to do what we want to do, when we want to do it. Suc...
Read more

To Assure Continued Growth and Profitability, The Insurance Industry Needs Another Revolution

  During the last quarter of the 20 th century the life insurance industry was forced into a period of structural and product change that had not been seen in over 100 years. Most of the established insurance institutions, comfortable with the way things were, not only did not recognize the need for change, but they also stubbornly tried to ignore and resist it. The needed change was driven by several factors, but the primary trigger was the consumer who began to reject the traditional business model of the life insurance industry. At the time, the industry’s business model was predicated on offering, through a cadre of exclusive sales agents, long term products designed to protect against the economic cost of dying young. For almost a century this approach resonated with consumer needs and concerns and insurance companies grew to become financial behemoths.   However, during the 20 th century medical advances increased male life expectancy from 42 to 73 years.  As ...
Read more