This is the third post in a multipart “How To Not Suck… ” series on insurance. Previous installments looked at auto insurance and homeowner’s coverage. Future posts will look at long-term care, and disability insurance.
If you make it through your house burning down and that car accident, you might think you’ve got a the nine lives of a cat. But those nine lives will run out eventually, so you had better learn how to not suck… at picking a life insurance policy.
Death and taxes.
Blah, blah, blah.
But when you die, we imagine you don’t want to leave your family destitute, hounded by debt collectors, needing to sell the family farm just to pay for food.
Well, that’s where life insurance comes in.
Not all life insurance is bad — it can be fantastic — but a strong-armed salesperson who preys on your emotions might take you for more than you can afford, and a policy that doesn’t fit your family’s needs.
Here are 15 things you may not know — or that you need to know — about life insurance.
1. You need a higher death benefit than you think.
A $1 million dollar policy may seem like a lot, but if you have a spouse and two young kids who aspire to college someday, and you have some debt, $1 million may not get them very far if you want them to maintain the lifestyle they’ve become accustomed to.
How much coverage you need depends on your salary, whether or not your spouse works, if you may need child care, and the debt you may leave behind: college tuition, credit card bills, a mortgage, and more. Try these calculators from LifeHappens.org and MSN Money for help. Also check out BankRate.com’s Life Insurance Cheat Sheet.
2. Life insurance comes in several flavors, and you need to pick the right kind.
Term insurance will cover you for a set time period, and at the end of the period, you’ll no longer have insurance. This is often a good choice for young families who can’t afford permanent insurance, or for those who only want to be insured for a certain time period.
Permanent insurance will give you coverage for as long as you pay the premiums (and sometimes longer), and in addition to the insurance part, it also has an investment component. It comes in different flavors — whole, universal and variable — and they offer different investment options and the ability to use your cash value to pay premiums.
The other important difference is cost. Term policies are generally much less-expensive than any kind of permanent insurance, which charges additional fees for the investment component of the policy. Try BankRate.com’s calculator to decide which kind is best for you and use the Insurance Information Institute’s glossary to make sure you understand all the terms in any policy you consider.
3. Do you need permanent insurance, or does your salesperson need a high commission?
We’re not saying that permanent policies are bad, but they are costly, and they do offer your insurance agent a higher commission. If your agent keeps pressing the investment component of a permanent policy, take a step back.
If you bought a term policy and invested the difference you would have paid for the permanent policy, how much of a nest egg could you accumulate? We’re not saying it’s impossible for the permanent policy to do better, but if you want insurance, buy insurance. If you want an investment, buy an investment. The added layers of fees and fewer investment options that come with permanent policies make it likely that an index fund or exchange-traded fund will do you better in the long run. And yes, before you salespeople start sending us nasty e-mails — permanent policies do have tax advantages, but so do 401(k)s and IRAs.
4. Look for guaranteed level premiums.
You don’t know exactly what your financial future holds, but it’s a fair guess to say that if your premiums go up over time, it may be harder to pay the premiums. And if you don’t pay, your policy will lapse.
Leaving you and your heirs with nothing.
5. Don’t wait too long to get coverage.
The younger you are, the cheaper premiums will be. And, if a health problem comes up before you get coverage, you could face higher premiums or be denied coverage entirely. Also, if you have debt or a mortgage or college-bound kids and you don’t have any insurance, they get nothing if you get hit by a bus. So what are you waiting for?
6. Forget the fancy-pants.
Many policies are often sold with riders, or additional coverage for an additional fee for items such as accidental death, illness, income replacement or waiver of premiums. The benefits to these isn’t usually worth the cost, so consider them closely.
7. Review, review, review.
8. Don’t count on your employer’s insurance alone.
9. Think about your estate planning needs.
(Again, remember life insurance distributions are based on your beneficiary designation on the policy, not on what your will says.)
12. Don’t lie.
11. Make sure your beneficiaries or someone you trust knows where the policy is.
You know, in case you get hit by that bus. No insurance company will know you’re dead and start ringing your beneficiary’s doorbell. Someone will have to notify the insurance company before any benefits are paid.
12. Consider your health — in good times and in bad.
Life insurance not a one-shot deal. If your health changes for the worse, you may want to see if you can convert your term policy for a permanent one because you may not be eligible for new insurance. But if you lose a significant amount of weight or you stop smoking, you could be eligible for a less expensive policy.
13. Avoid no-medical policies.
While it may be less hassle to qualify, these will cost you more in the long run.
Just think: the insurer has to set rates to cover those with good health and those with poor health, and who is more likely to want a policy without a medical exam? Yes, those in poor health. If your health means your rates would be higher, do the math to see if you’re better off investing what you’d pay in premiums instead.
14. Don’t bother with accidental death and dismemberment polices.
These policies are commonly sold by credit card companies. Also avoid lender-offered policies that promise to pay or your mortgage or other debts. A straight-up term policy will cost less for more coverage.
15. Your kids — unless they’re the breadwinners in your family — don’t need life insurance.
And yes, they’re even marketed in those freebie diaper bags you get when you deliver a child in a hospital. Case in point: My late dad bought me a whole life policy with a $50,000 death benefit when I was 10. It wasn’t because he wanted a payoff when I was dead, but he was thinking in terms of a long-term investment for me (while trying to help out a friend with a new insurance sales job). Today, the cash value part of the policy is worth $16,000, so I could take that money out now. Or, my beneficiaries would get a total of $66,000 when I die. But, rather than paying the $340 annual premium, my dad could have invested the premiums in a mutual fund earning 8%, and over 33 years, it would have been be worth $53,593 (Thanks to the SEC’s compound interest calculator for help with the math.)
So while the insurance policy would do slightly better for my heirs, the investment would be have been better for me during my lifetime. Something to think about before you buy a policy for a kid.
Because you made it this far, willing to think about your demise and all, enjoy this life insurance commercial.
Next week… long-term care! Don’t pretend you’re not excited…
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