|
Life
Insurance
Life
Insurance
Life insurance is critical to financial planning. It's
a necessity for anyone with dependents that would be affected
financially by his or her demise. Yet life insurance is one of the
hardest financial products to understand, and it's sold by agents who
are sometimes more concerned with their commissions than with the
client's needs. The end result is that too many people surrender their
life insurance decisions to agents, grab the first policy that seems
reasonable, and pay far more than necessary for coverage.
What you need to
know
There are basically two types of polices
1.
There are term policies, or pure insurance coverage.
And then is whole life. With the many variants of whole life, which
combine an investment product with pure term insurance and build cash
value.
2. Insurance is sold, not bought. Agents sell the
vast majority of life policies written in the U.S. because the life
insurance industry has a vested interest in pushing high commission
(and high profit) whole-life policies.
3. Whole life is expensive. Policies with an
investment component cost many times more than term policies. As a
result, people who buy whole life often can't afford an adequate face
value, leaving themselves underinsured. Whole life policies are built
on assumptions. The returns quoted by the agent are simply guesses --
not reality. And some companies keep these guesses of future returns on
the high side to attract more buyers.
4. Keep your investments and insurance strictly
separate. There are better places to invest your money and without the
high commissions of whole-life policies.
5. Buy enough term coverage to satisfy your needs.
Life insurance is no place to skimp, especially with rates at historic
lows.
6.
Make sure the term of the policy fits your needs. You
want the policy to last as long as it takes for your dependents to
leave the nest or for your retirement income to kick in.
7. Buy when you're healthy. Older people and those
not in the best of health pay steeply higher rates for life insurance.
So buy as early as you can, but don't buy until you have dependents.
8. Use the Web to shop for insurance. Buying life
insurance has never been easier, thanks to the Internet. You can get
tons of quotes, and no pushy salespeople.
Types of policies
There are two basic kinds of life insurance: whole-life
and term insurance.
Whole-life policies (sometimes called permanent insurance) combine life
coverage with an investment fund. Here, you're buying a policy that
pays a stated, fixed amount on your death, and part of your premium
goes toward building cash value from investments made by the insurance
company. Cash value builds tax-free each year that you keep the policy,
and you can borrow against the cash accumulation fund without being
taxed. The amount you pay usually doesn't change throughout the life of
the policy.
Universal life is a whole-life policy that combines term insurance with
a money-market-type investment that pays a market rate of return. To
get a higher return, these policies generally don't guarantee a certain
rate. Sales of universal policies far outpace those of plain whole
life, because of their higher yield.
Variable life and variable universal life are whole-life policies with
an investment fund tied to a stock or bond mutual-fund investment.
Returns are not guaranteed.
Term Insurance: This is by far the best type of coverage money can buy!
You're buying life coverage that lasts as long as you pay the monthly
premium. Annual-renewable term is purchased year by year, although you
don't have to re-qualify by showing evidence of good health each year.
When you're young, premiums for ART are dirt cheap, as low as a few
hundred dollars per year for $250,000 worth of coverage. As you get
older, premiums steadily increase. Level-premium term has somewhat
higher but fixed premiums for longer periods, anywhere from 5 to 30
years.
Buying strategies for
the best coverage
Getting the right policy at the right price can be
incredibly easy or exceedingly difficult. It all depends on how you
proceed.
|
|
Life
insurance is a highly competitive business, in which the sales force
depends almost entirely on commissions. Insurance companies pay fat
commissions to their agents for selling whole-life policies. Perhaps 80
percent of your first year's premium is the agent’s commission and the
premiums for these polices are often five times that of term. By
contrast, the typical commission to the agent who sells a term policy
is about 10 percent.
|
Now you know why the agents push whole-life policies as if their
livelihoods depend on it. If whole-life policies were beneficial to
consumers, our story would end here. But the fact is, the vast majority
of those who need insurance should buy term. Stay clear of other
polices!
And,
while not long ago you couldn't buy term policies with level premiums
for periods of more than 10 or 15 years, today you can easily find 20-
and 30-year term policies.
Agents will argue that whole-life policies are superior because you can
keep them the rest of your life and build up cash in them tax-free
which can then be borrowed. That's true enough, but they don't tell you
about the high fees and commissions built into whole life. As well as
surrender charges (if you want to cancel the policy) that often leaves
you with little or no cash value five and even 10 or 15 years after you
took out the policy.
The tax-free buildup of cash just isn't that powerful anymore, given
the proliferation of IRAs, 401(k)s and other tax-advantaged savings
vehicles that have tiny commissions, much higher yields and complete
portability.
So stick with term, and don’t use
insurance as an investment vehicle, it’s not one!
The amount of coverage is important!
When buying life insurance, make sure you've got enough.
There
is no one answer to how much coverage is enough. Some financial
planners say five to seven times your annual income is sufficient.
Others argue that you need twice as much in face value. That would mean
a person making $50,000 a year should have anywhere from $250,000 worth
of coverage to $750,000 or more.
The sole purpose of life insurance is to replace your income in case
you die, so that your dependents can maintain their current lifestyle.
Things to consider include whether the surviving partner will have
child care expenses if one partner is out of the picture. Do you have
other assets on which to draw? Will your children be out of the nest
soon? These, and many other factors will influence the decision on how
much coverage is truly needed.
It's worth noting that many people who buy whole-life policies are
underinsured. Because of the investment component of whole life, the
policies are much more expensive than term insurance.
To
make up for this, many people simply buy less coverage, defeating the
purpose of buying insurance in the first place!
How
long should your policy be?
Agents like to talk about policies you can keep throughout your life.
What they sometimes won't tell you is that you don't need life
insurance coverage throughout your life.
The secret to buying a policy with the right term is figuring out how
long you need to be insured. You start by estimating when your children
will be out on their own.
So
if your children are 3 and 5 now, you'd probably want a policy that
covers you at least until the youngest is 22, so that's about a 20-year
term. But this depends somewhat on your age as well.
Say you also want to cover your spouse for your lost income until what
would be your normal retirement age, say 65, and you're only 35 now.
Then you would want a 30-year policy.
Keep in mind that insurance gets very expensive as you leave your 50s.
So you'll pay more to cover yourself until 65, even if you lock in a
level-term 30-year policy when you are 35.
Coverage
past age 70 or so may be unattainable for some. Depending on one’s
health? An insurance company will perform a health exam on the person
who will be insured and will base their premiums on a number of things.
Including health, age, race, family health, where you live, etc.
Life insurance is not a substitute for a retirement plan. You want to
plan so that you'll have enough to live on when you retire, and you
won't have to keep paying insurance premiums.
There are exceptions, however. People who start families late in life,
or who have complex estate-planning issues, may well have a need for
life insurance beyond the customary retirement age.
Will they question my health?
Insurance can be difficult and expensive to obtain if
you are not in good health.
The
cheapest rates, known in the business as select or preferred, go to
those who are in good health and who have a family history of good
health. If you take heart medication or are grossly overweight, you'll
pay 50 percent more than preferred rates.
If you smoke, and have a poor driving record or engage in risky sports
like skydiving, you'll pay even more for life insurance. Rates can be
four times more than the preferred rate.
If you fall into one of these more expensive categories, it pays to
shop around. One company may charge much more than another, depending
on how it estimates the risk of your condition (that's called
underwriting). This is where a knowledgeable agent may come in very
handy. Internet and phone quote services aren't set up to deal with
nonstandard policies.
Why, some people might ask, should I tell the insurance company about
negative information that will raise my rates? Well, even if you
somehow get around the medical tests and other checks done before the
policy is issued, you're just kidding yourself.
Insurers seldom pay out large claims without doing some checking. If
the company finds out you've lied, the claim may be denied, or your
heirs could be tied up in court for years.
Always have a top rated insurance company cover you! Reason being, when
it’s time to cash in your policy you won’t have to take the insurance
company to court, or worst try to locate them if they are a
fly-by-night! A good company brings you peace of mind!
Shopping on the Web
Many companies now sell life insurance on the Web. The key to buying on
the Web is to shop by price and by the company's rating. Several
agencies, including Standard & Poors and A.M. Best, rate insurers
on their claims-paying ability.
Look for companies with low
prices, the term you want, and a top rating.
Here are some links that offer policies to a multiple
companies:
-
RightQuote has more than 100
companies in its database, all accessible online.
-
Quotesmith has quotes from over
300 companies and much detail on the policies available. Links to
companies that sell low-load and agent-sold policies. Also supplies
ratings for the insurers from the major rating agencies, such as AM
Best.
-
InsureMarket has some pretty
good worksheets and advice. Lets you save quotes for later retrieval.
Lists an 800 number. This site is run by the financial software
powerhouse Quicken.
-
Accuquote has over 1,000 policies
in its database. But you need to fill out a very long form to get a
quote. Site is an independent service.
Life
Insurance
Copyright © 2000 - 2006 HomeBaseBuck$™ All Rights Reserved
HomeBaseBucks.com, HomeBaseBuck$.com, HomeBaseBucks, and Home Base Bucks
are Trade Marks of Clark County Ent., Inc. 5344 Images Court, Las
Vegas, NV, 89107
|
