This is a guest post from Ray at Financial Highway. Earlier today, Ray shared the basics of life insurance.
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.
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.
Earlier today, Ray shared an introduction to life insurance.
This article is about Hints and Tips, Insurance
61 Responses to “14 Tips for Purchasing Life Insurance”
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What do you mean by “terminal illness?”
If you mean the rider that allows one to access all or a portion of their life insurance after getting a terminal illness diagnosis, then the answer is no. Most do have some version of it, but each company has a different policy limiting the amount you could receive. I usually refer to this as a living benefit!
If you mean as to paying off the face value at death, then, barring fraud in the application, yes all life insurance will pay off from a terminal illness at death.
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Obviously, the buy term invest the difference argument is a very generic recommendation. Having permanent/whole life insurance not only allows the client to have level premiums and a variety of tax advantages but the insurance lasts forever. 99% of term policies do not pay out for a variety of reasons, so making the argument that whole life policies are the where insurance companies make all there profit is false.
A person should look into whether the insurance company is a stock or mutual insurance company. Mutual company’s pay all dividends to policy holders rather than stockholders, which makes owning whole life policies more advantageous.
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I had a term insurance policy that worked very well for me. I was able to pay off my daughters tuition and still save some. When it expired i bought another one. But then again, that might not suite everyone. Please don’t form the common misconception that this insurance policy served as an investment. I am totally against that idea. I bought the policy solely for the purpose of securing my life and give my family the financial security they need. The most important piece of advice given here is to do your homework. once you start working at it you will see how the pieces of the puzzle come together. So go out and get your quotes. Excellent post!
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I disagree with the statement that : 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.
Often you didn’t see any benefits to the client?
So an accidental death benefit rider is not beneficial when the insured dies in a car accident and pays DOUBLE THE AMOUNT [both Face and additional due to the fact that the death was "accidental"]???
The Premium Waiver is not beneficial when an insured becomes disabled, and now because of the fact that they have the PW, after the 6 month waiting period [when there premium is refunded by the way, for the last 6 months] they don’t have to pay anymore so long as the disability continues?????
RIDERS ARE GREAT!!!! Because they provide extra coverage!!!!
I sell Quality of Life…Insurance, which is 1 policy, with 1 premium, that has 3 riders [for Critical, Chronic and Terminal illness Accelerated Benefit Riders] built in, at no additional cost. Life Insurance People Don’t Have to Die to Use!!!!
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Term Life I feel has it’s uses, and yes if you want to financially plan for your family that’s fine, while at the same time protecting your house and making sure that if something did happen that the kids could go to college etc. However, whole life can also have it’s place as well. If somebody understands the “gamble” of paying for 30 years on a term life and outliving the coverage, and won’t gripe about all the money they spent “for nothing”, then that’s good. Yet, with whole life, I like how the insured puts the company on the hook, so to speak to have to pay the money.
Now, what’s the point if a single mother of 3 children, at the age of 30 purchases a 30 year term life policy, just to cover an possible situations that may arise in the event of her untimely demise, when in fact, she outlives the coverage, her children are in their 30′s, she now has no coverage, never invested, they all have fallen on hard times and now can’t even afford the average burial cost at $10,000.
Ofcourse, you’d say, well, she should’ve invested. Let’s face it, most people have a difficult enough time as it is already saving %5 of their weekly paycheck, let alone 40%, let’s say. Should’ve, would’ve, could’ve. That doesn’t work in reality.
I say, purchase what you NEED AND UNDERSTAND.
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I am trying to make a decision on what type of term life insurance to buy. One of the companies I spoke to gave me a quote for 500k at $30 a month. They also offered the option of paying $60 a month for the same coverage but if I outlive the policy I would get the money I paid for the premium back. Can anyone one give advice on if it is worth it to pay more to attain the money back at the end of the policy?
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Valid points in the article.
Everyone has different needs and wants and financial goals that you are trying to achieve. That’s what makes L.I. need so subjective.
You should find an advisor that you trust and has your best interest in mind. You may find a cheap policy but those agents are mainly out to make product sales and not give you the best financial advice. (They may sell you something you don’t need.)
Perm L.I. is a particularly useful tool to help people save money and be able to take out that money tax-free. We are in the lowest tax brackets right now and with the economy the way it is, the government needs money. How are they going to get it? Raise taxes. To be able to pay taxes now and take out for free later is something that can greatly help and not diminish your retirement nest egg.
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Finally pulled the trigger last month and bought a 30 year term policy. I feel so much more at ease now. Thanks for these tips, they saved me some dough in my search for a policy!
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I have a $1 million 20-year term life insurance policy, in order to take care of my family in case something happens. I also have an EIUL, where the face value is turned down as low as possible for the amount I invest in it to reduce the costs as it builds savings. This is to provide me supplemental retirement income that is TAX FREE. Since the average performance of people owning mutual funds is less than 4%, this offers me a much a much better place to store my wealth.
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