Buying Life - Be Smart

Nobody likes to talk about life insurance except life insurance salespeople. Most people feel that the whole thing is yucky: it’s expensive, confusing, and mostly about sickness and death.

But the single best way to ensure you can get insurance when you need it is to buy it when you don’t. And the earlier you buy your insurance the cheaper it will be.

If you work for a company that offers life insurance as part of your benefits package, don’t get complacent. If you change jobs down the road and have become uninsurable in the interim you won’t qualify for new insurance. Make sure you have a basic private policy to cover your butt.

Here are some things to avoid:

1) Don’t think of insurance as an investment. It’s risk mitigation and it’s a necessary part of a sound financial plan. Some types of insurance do build up money over time — products like whole or universal life insurance — that’s not the first reason for buying insurance. Insurance is about taking care of the “what ifs.” So the amount it will pay out to help your family cope should be your primary consideration.

2) Don’t let premiums make the decision for you. If you start from the premise that you can only afford to pay $X, and let that decide how much insurance you buy, then you’re going about it all wrong. First figure out how much insurance you need and then choose the type of insurance that will give you the level of coverage you’re looking for.

3) Don’t buy term because you think it’s the only game in town. The “term vs. permanent insurance” debate has ranged since Moses was a lad. Term insurance, for which you pay only for the death benefit, may be the best fit for some people, particularly those who are older or who need a whopping amount of coverage. Permanent insurance may be a better choice for people who plan to keep their coverage for the long haul.

4) Don’t just forget about it. At least every year or two, re-examine your policies to be sure they are still doing the job. If you got married, divorced, had a baby, or had a big jump in income (and expenses), the amount of coverage may no longer be adequate. Or you might need to add a second, different type of policy, to meet new needs. You don’t have to buy from the same insurance company. Shop around.

5) Don’t forget to change beneficiaries. If you get a divorce, remarry, have a new baby, or if your partner dies, you need to review your insurance to make sure you’re not leaving a stash of cash to nobody — or worse, someone you hate!

6) Don’t needlessly replace a policy. Be careful about dropping a policy just to get a “better-performing” policy or for a cheaper premium. The flip side of this is people who automatically renew their term coverage, even when the reason for having insurance has grown up and left home.

7) Don’t name your estate as beneficiary. Insurance benefits are free of income tax when left directly to beneficiaries, but face probate if the benefits become part of an estate.