8 ways to save on life insurance
Don't let skilled salespeople talk you into buying too much coverage or types of life insurance you don't need.
This post comes from Stacy Johnson at partner site Money Talks News.
It's also likely one of the least-understood major expenses. Many people buy it when they don't need it, and many need it and don't buy it. And some don't have it and don't need it, but they allow salespeople or family members to make them feel guilty for forgoing it.
Check out the following video, then read on for more details.
As I said in the video, you need life insurance if those you leave behind will suffer financially from your death. This is typical when you have children, debt and a one-income household, when losing the breadwinner would be financially tragic.
When you've paid off the house, the kids are gone, the savings accounts are topped off, and your death would just be an excuse for your remaining friends to get together and have a drink, your need for life insurance is over.
Here are eight tips to save when you're buying life insurance:
Insurance search tools can help you compare quotes and features. But remember that no online insurance search engine includes all companies.
Search tools are a great way to make sure what you have now is still a good deal. But if you're buying your first policy, or know you're going to replace existing coverage, more due diligence is in order. Check several search sites and beat the local bushes as well.
2. Buy term.
There are two basic classes of life insurance:
- Permanent or whole life. As the name implies, these policies offer a lifetime of coverage. They also combine a savings account and life insurance contract, allowing you to tap the savings component, known as cash value, should the need arise.
- Term insurance, on the other hand, has no cash value and covers you for a specific period of time, from one year to 20 or more. If you die during the term covered, your beneficiaries get a check. If not, you're out the premiums.
While permanent sounds like a no-brainer, most people should buy term. The reason is simple: Term is much cheaper. In addition, you usually need insurance when you're younger, in debt, and raising a family. As you age, pay off the mortgage, and no longer have people depending on your income, the need for insurance withers. (That's good, because the older you get, the more insurance costs.)
Be aware that many insurance agents and some financial advisers will give you the opposite advice. They believe the forced savings offered by a whole life policy is worth the extra cost. But most objective advisers will tell you to buy term and use the difference in price to save and invest on your own.
The longer the term you buy, the less it will cost per year. In other words, you're better off getting a 20-year-level premium policy than one that renews every two years. In an ideal scenario you'll pick a term that matches your need for insurance.
3. Don't buy more than you need.
As someone who sold life insurance back in my stockbroker days, I can assure you that fear is often an integral part of the sales process. In addition, the insurance salesman (or online calculator) makes assumptions that may not accurately reflect your financial need.
For example, many salespeople will simply say to multiply your annual salary by seven. Many calculators don't take Social Security survivor benefits into account. They might also assume you want a benefit big enough so your spouse and children can live forever off the interest alone. Or that your kids plan on attending Harvard. Or that your mortgage balance isn't decreasing with every payment you make.
How much insurance you need isn't an exact science. Maybe you want to leave your survivors wealthy, or maybe you just want to leave enough to pay for your funeral. But if you leave it up to a company-sponsored calculator or salesperson, expect a big death benefit -- and a big premium to go with it.
Better idea? Figure out what your death would mean financially to your family and determine their needs, both short term (paying for your funeral) and long term (paying off the mortgage and college costs). When you've arrived at an estimate, subtract the money you have now or can expect from Social Security or work-related policies, then cover the shortfall with insurance.
4. Stay away from commissioned salespeople.
Woody Allen once said, "There are worse things in life than death. Have you ever spent an evening with an insurance salesman?"
While Allen was probably referring to boredom, he could have been highlighting another drawback of commissioned salespeople. Simply put, the more you buy, the more they make.
But avoiding commissions doesn't mean avoiding expert help. There are plenty of fee-only planners who can help you evaluate your need, then steer you to low- and no-commission policies, like those from TIAA-CREF and Ameritas. Sure, you'll have to pay for the adviser's time, but you'll probably offset the cost with less-expensive insurance.
5. Avoid guaranteed issue (if you can).
Ever see a TV commercial, usually directed at older folks, offering insurance with no medical exam and insisting "you can't be turned down"? That's guaranteed-issue life insurance. It doesn't take a rocket scientist to figure the angle: The death benefit is so low, the first few years of premiums may add up to more than your beneficiaries will receive.
Avoiding a physical sounds convenient, but you'll probably get a better deal by submitting to one, even if you're not in the best of health. If you know for a fact that you're otherwise uninsurable, you may not have a choice. But if you have alternatives, explore them first.
6. Stay on top of it. Health issues will make your insurance more expensive, so getting healthier can mean savings. If you quit smoking, lose weight or make other life changes that lower the risk for the insurance company, don't be afraid to contact them and ask for a reconsideration. But be prepared to provide proof, such as an extensive medical history, to get a lower rate.
Health isn't the only thing that can lead to changes in your policy and premium. Have a new baby? You might need more insurance. Pay off the mortgage? You might need less. Periodically re-evaluate your coverage needs and costs.
If you need to increase your coverage, you may be able to do so less expensively by buying a rider (an addition to an existing policy) rather than taking out a new policy.
7. Pay annually.
As with most kinds of insurance, companies often charge a little more if you pay premiums monthly rather than annually. You should also ask about discounts for allowing the company to tap your bank account and collect the premium automatically.
8. Don't buy it for the kids.
Unless your child is contributing financially to your family, you child doesn't need life insurance.
As with the whole life-versus- term argument, this advice is not fully embraced by everyone. There are those who insist that buying a permanent policy for infants is a good idea, for three reasons:
- If they should later develop a health condition that renders them uninsurable, at least they'll have some coverage.
- Although it's certainly more rare than with seniors, children die.
- They'll establish a permanent savings account.
While these are valid arguments, they're not enough to convince me or most financial advisers. A savings account for kids is a great idea, but there are lower-cost ways of going about it.
More on Money Talks News and MSN Money:
Good Morning Stacy,
First, I am a commissioned salesperson. I have a CLU, ChFC, and a CFP. I have worked with life insurance for 22 years. There are, in fact, very few people who buy insurance when they don't need it. Most people are underinsured by a factor of 2 or 3. I reccomend that the vast majority of clients buy term. I do the health analysis and price out the best deal. Your inference that I am going to sell my clients an inappropriate product to make more money is an insult to me and to all the agents who are doing a service to thier clients by pointing out to them that they need the coverage and then making sure they get it at a good price.
I tell my clients up front that I make a commision on what I sell then and I have no problem disclosing that commission. There are bad apples in every basket, but your assumption that a commisioned salesperson is automatically dishonest is wrong and not supported by fact. It sounds like you are making yourself look better by dumping on someone else. That is not good journalism.
Vernon Klassen CLU, ChFC, CFP
This article is not complete, there are new term life insurance policies that have extra benefits that you do NOT have to die to use. For example, you would be able to collect benefits from your life insurance policy if you had a Chronic Illness, Critical Illness or Terminal Illness. In many cases this insurance does not cost more than a regular term policy.
This life insurance also has a great conversation provision, which simply means that if you are diagnosed with an illness you can convert the policy to a permanent policy without having to submit to a new exam. Questions, please contact me @ 609-922-6216
Now this is just an overview of this kind of life insurance, and you should consult with a professional before doing anything.
This is one of the worst pieces I have ever read on life insurance. Independent agents who are commission based can offer the exact same products for the same premiums that websites and fee only planners offer. The fact that the author says "Sure, you'll have to pay for the adviser's time, but you'll probably offset the cost with less-expensive insurance" is completely misleading. The premiums depend on health, death benefit, type of coverage, length of term (if it is a term policy), age, and carrier. The rates will be the same whether the sales person makes a commission or not.
Whole life or universal life policies feature great benefits if they meet the individual's goals and objectives. Saying that many agents give people bad advice because they offer whole life or universal life is insulting. When term is the best product for my client, I happily recommend that to them. However, if I think that a permanent policy will meet their needs, then I like to show that to them as an option and let the client decide. This author sounds like more of a pushy, uninformed salesman than anyone I know in the business.
Most insurance agents are good, smart, honest, and hardworking people. Sure there are a few bad ones, but what industry does not have a few bad apples in it?
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