Buying life insurance is an important part of financial planning — but understanding insurance and buying the right product can be tricky. From whole to term life, riders to convertibility clauses, how do you make sense of all the choices?
Most people rely on the expertise of their insurance advisor, broker, or sales representative to help them make the right decision. Yet, for some people, insurance representatives have developed a bad reputation, and many people do not trust the “recommendations” they receive.
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From my own experience in the insurance industry, and knowing how representatives are trained, I wouldn’t trust many insurance sales reps either. Here are some steps you can take to ensure you get the right product for the right price:
- Understand your needs. No one understands your financial situation better than you. That means you should avoid letting someone else tell you how much protection you need. You can get a rough estimate of your insurance needs by adding together your debt, estimated funeral costs, and six months to a year of income replacement. [J.D.’s note: One common rule of thumb is to multiply your yearly income by between 5 and 10, using the lower level if you don’t have many dependents and few debts, and the higher level if you have larger debts and multiple dependents. But Ray is right: understand your own needs.] Taking stock of your financial policy can allow you to select the right policy for your needs. As sales representative, we were trained to sell large policies. Remember, you may not need an exorbitant policy — you need the policy that’s right for you and your family’s financial situation.
- Understand term insurance versus permanent insurance. Understanding the difference between term and permanent life insurance (such as whole life) can help you make an informed decision about your insurance needs. Today, a term insurance policy should be able to cover most of your debt and financial needs. In turn, you may not need to purchase a whole life policy. Try not to be sold by the “what if” scenario you might hear from an insurance sales rep. Insurance companies traditionally make more profit from whole life policies than term policies, so be prepared to hear a sales representative promote whole life as the best possible choice (even though it might not be the best fit for your needs). Remember, buy what you need and make adjustments as changes become necessary. Term insurance is typically renewable and should have a convertibility clause which allows you to make changes in the future. There are certain situations where a whole life policy maybe more advantageous than term; however, do not purchase it simply because your sales representative told you should.
- Speak with an independent broker. These brokers will have access to many more products than just one firm can provide. When I worked as an independent broker, I was able to offer much more to my clients than just a company product.
- Avoid one-meeting recommendations. If your broker makes a recommendation in the first meeting, you know that they have not really analyzed your situation and looked for best options. So just say, “No, thank you” and keep researching.
- Understand how the advisor gets paid. Find out if they are compensated through commission, fee-plus-commission, or fee only. If there is any commission involved with the sale, make sure to look at all alternative products available. With commissions, the advisor may have a conflict of interest. Just because your advisor is commission-based doesn’t mean they are bad — just ask more questions with them. I always worked on 100% commission, but I would give my clients several options and disclose if I got paid differently.
- Recognize that insurance is for protection — not investing. Term insurance provides protection only, without a savings component. Whole life and universal life policies have a savings component and are much more expensive. You are almost always better off just paying for term insurance, and using the cost savings to invest elsewhere.
- Ask the tough questions. Don’t be afraid to ask the advisor questions. You should know the product inside out before buying it. Is the policy renewable and non-cancelable? How long are premiums guaranteed for? Is there an accidental death rider? What are the exclusions?
- Watch out for “know-it-all” advisor. If the advisor answers all your questions without referring to anything, or pretends she “knows it all”, chances are that she does not. Insurance policies are complicated, and even the best advisors do not know every product 100 percent and may have to look things up. There is nothing wrong with that.
- Compare similar products. When you price shop, make sure you compare similar products.
- Don’t replace old whole-life policies. If you have had a whole-life policy for several years, try not to replace it. You may lose all the premiums you have paid. You may also have to pay new administration fees (if applicable), and reset some clauses (such as the suicide clause). If your situation has changed and you need more insurance, just buy more. (This warning does not apply to term life.)
- Do not buy expensive riders. The advisor might ask you to add on all types of riders. Stay away from them unless you fully understand them and need them. Again, in training there was always an emphasis on selling riders. Often I didn’t see any benefits to the client.
- Do your homework. Make sure you do your homework before purchasing an insurance product. Make sure it fits your needs and budget, and make sure you understand the contract. The advisor is obligated to explain it to you. Don’t sign until you understand the contract.
- Take a 30-day free look. You have 30 days to look at the policy and understand it. If you are not satisfied with it during that time, cancel the policy and you will get your premium back.
- Keep it simple. Do not make your insurance planning complicated. Because it is based on protecting your family, it should be based on your needs. Don’t fall for all the bells and whistles the company may try to sell to you.
I hope these fourteen steps will help in your insurance planning. The basic idea is to educate yourself by doing your homework so that you can understand what you are buying.
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Ray has shared this introduction to life insurance.