A Few Thoughts On Buying Life Insurance

Risk Management

I’ll try to keep this short as well as informative. I’ll also be including some steps you can take today that will help you make a good decision when it comes to buying life insurance.

Life insurance is typically something sold. I prefer to put you in control so you can “buy” rather than be sold to. With a little knowledge you’ll be better equipped to talk with an insurance agent. And trust me… it’s better to make a good decision about buying life insurance today than to find out later you could have taken care of your needs for a fraction of the cost… so listen up.

First, how much do you really need? This calculation is based on several factors and more than one way exists to calculate this need. Instead of evaluating each approach (not the reason for this post) I will just direct you to use what’s called the “Needs Approach”. I’ll even make it simpler… go to this website [click here] and use this handy “needs” calculator.

Okay… now you’ve figured out how much you need. Now the question is, “what type of policy do I purchase and where should I buy it?”

Three major categories of life insurance policies exist; Whole Life, Universal Life, and Term. Moreover, each type has multiple sub-categories.

The purpose here is not for me to get into the nuances of each type… that would require a book, not a post. However, I do want to comment on each so as to help you understand why you might be sold one over the other.

Whole life (WL) is by far the most expensive (and pays the highest commissions) of the three; the reason, WL is guaranteed and builds cash value (well… as long as you pay premiums and the insurance company does not go belly up).

It’s because of these guarantees and cash value accumulations the premiums are through the roof when compared to Term policies offering the same death benefit.

Be mindful of WL insurance products being sold with “cash build up” as the main reason to purchase… even more mindful if the WL policy is being touted as an investment (it’s not, it is a risk management tool).

Not everything is negative here with WL. It has its place; however, it’s limited in my opinion (a discussion for another day) and not a best answer for just basic life insurance coverage. Rules of thumb… buy life insurance for the death benefit, not because it’s touted as a great investment. Remember, life insurance is not an investment.

Universal Life (UL) is similar to WL except the internal mechanisms are not guaranteed as is the WL. Newer UL policies do offer guaranteed riders, but they come with a cost. And still, any type of guarantee offered by an insurance company is only as good as the company itself. This leads to a side note… check out the financial strength of the company before you purchase the policy.

Numerous rating services placing letters and numbers on the quality and strength of life insurance companies exist. These can be confusing and misleading. One quick way to see a composite of all the ratings given to a life insurance company is to ask for its Comdex Score. Comdex is not a rating but a ranking of companies on a scale of 1 to 100 in relation to other insurance companies that are “rated” by rating companies. Just ask for the Comdex… the closer to 100 the better.

Back to UL… UL is also sold because of the “projected” cash build up. This is misleading. Projecting rates of return is not possible unless you can tell the future. So, when you are told that such and such UL policy has a “projected” cash value of “X” amount 30 years from now, just know those figures are totally unreliable. Moreover, the illustrations used to sell this idea are overwhelming to an untrained eye and can mislead even the brightest of consumers.

Buying “life” insurance because of future cash value is flawed. It is better to buy life insurance on the premise of needing the death benefit when you die, not the cash value if you live.

About Term: Term life insurance is a product where you only pay for the actual coverage and the length of time you need coverage (it’s like renting). Premiums are by far the lowest of the three and by far the most affordable.

If you’ve already figured out the amount needed you might ask “where do I buy it.”

I would start with your employer benefits. If you can purchase a large block of insurance through your group plan then do so. It’s typically less in premiums and may be less of a hassle to acquire.

A side note… when buying group Term, and you terminate employment with the company offering benefits, you typically cannot take the coverage with you as Term. Usually, the only way you can take this coverage is by converting to a more expensive WL or UL product. Just ask the benefits department what you can do with your group insurance coverage if you leave or are terminated from employment.

If the group Term is overly prohibitive with allowing you to take it with you, then it might be a better option to buy your Term coverage (or part of it) outside of your employer’s benefits. In this case, you own the policy regardless of your employment circumstances.

You can purchase policies online or from an insurance agent. Just make sure to get quotes… multiple quotes.

Life insurance pricing over the last many years has become highly competitive. Thus, rates have dropped precipitously resulting in lower premiums to consumers. Just make sure you are taking advantage of this situation. If you are quoted premiums from only one or two companies you could be missing a better deal. Ask for multiple comparative quotes.

About quotes: this can be very misleading to consumers. I’ll try to keep it short but this is important. An insurance quote is more of an estimate of premiums, not an official offer. Until you go through underwriting an official offer is not given. So, the premium quoted for “X” amount of insurance coverage might actually be higher when the underwriting is complete.

Many factors affect the underwriting decision; height, weight, medical history, vital signs, as well as some family history. So don’t always count on the quote.

A good agent will help control this expectation as long as they are not trying to get your business by giving you the lowest possible quoted premium so you will just sign the application. Make sure to discuss medical history, family history, height, weight, vital signs (e.g., blood pressure), etc. with an agent to get a realistic expectation of premiums.

When purchasing Term insurance ask these questions:

“What are the conversion options and or restrictions for converting this Term policy?”

No one knows the future and you might end up in a situation where you will need (or want) to change your Term to a permanent policy such as WL or UL. Better to know ahead of time what you can and cannot do with the policy.

Also ask: “Are the premiums guaranteed for the term of the policy?” Term policies are called so because they last for a set period of time (e.g., 5, 10, 20, and 30 years). However, some Term policies have written into the contract that the company has the right to increase premiums up to a certain level.

These “rights” the company reserves for themselves are to manage adverse conditions. Example: an insurance company has a scenario or a series of scenarios that creates adverse losses. The insurance company can raise premiums within the guidelines of the contracts written. In any case, just ask if the premiums are guaranteed for the term of the policy.

In general, Term life insurance is sufficient to manage your life insurance needs. However, each individual and family is different and might find a permanent products (WL or UL) better serves their needs. But for most, Term is more than adequate and is a better fit. And as mentioned before, don’t buy a policy because of some illustrated future cash accumulation. Buy it because of the death benefit needed.

I hope this gives you some insight… happy shopping.