Are You Buying Life Insurance

Are you considering or being pressured to buy life insurance? Join the crowd. Life insurance is one of the most ubiquitous financial products to ever be sold. While life insurance can be a valuable tool in any financial plan, knowing if you even need it -- along with the right amount and type to buy -- can be challenging. There are questions such as: How do I know if I need life insurance? If so, how much life insurance do I need? What type of policy should I buy? How do I know if I am getting the best value and price for the life insurance I buy?

Purchasing life insurance is often tedious, intimidating and complicated, but it does not have to be that way. The insurance companies may offer multiple confusing policies and throw around a lot of jargon that sounds like a foreign language, but in reality, the concepts are simple. Once you understand the true basics of life insurance, your decision can be straightforward and result in the best buy for you.

What you should know about life insurance - The purpose of life insurance (and, really, its only value) is to offset the economic cost of dying. If you have a spouse or young children who would be faced with financial hardship in the event of your death, life insurance proceeds can solve that problem. If you are a key person or partner in a business, life insurance can help to stabilize the business in the event of your death.

If insurance companies try to convince you that a life insurance policy is anything other than a way to replace your income or long-term economic value to a family or business in the event of your death, they are doing so for their benefit, not yours. Life insurance is not an investment -- it is not a way to make money or an effective tax hedge.

There is an uncomplicated way to decide if you even need life insurance. Ask yourself: If I die, will anyone I care about suffer an economic adversity that I want to prevent? If the answer is no, then you don’t need life insurance. If, however, you want to protect others from the potential economic cost of your death, the right type of life insurance is the best way to accomplish that objective.

If you need life insurance, what type should you buy? - Life insurance companies have more confusing policy options than a Chinese restaurant. But when it comes down to it, all insurance companies pine to sell you some form of what they call “whole life” or “permanent insurance.” (Both are subtle marketing terms used to suggest you should buy and keep paying premiums on the policy for your whole life.) This type of policy has been the backbone, best selling and most profitable product of the life insurance industry for years. So-called “whole life” may have been a reasonable option in the 20th century when the consumer had few other financial options, but that is not the case today.

The supposed benefit for the buyer of whole life is that premiums will never rise and, over time, a certain amount of “cash value” will accumulate in the policy. The truth is that whole life is more like an annuity for insurance companies than a benefit for policyholders. What makes the product so profitable for the insurance company is that, when the insured is young (and least likely to die), the premium charged is hundreds of times higher than the actual cost to provide the promised death benefit. The insurance company invests the excess premium and keeps the profits for itself. Insurance companies know that, by the time the insured ages and is more likely to die, over 97% of the policies will have been canceled with no death benefit paid. That is a good deal, if you are an insurance company but not so good for someone who pays inflated premiums for years and turns out not to need the insurance.

If you do need life insurance, the best way to meet that need is to buy it on a temporary basis for a specific term. For example, your children are not going to be young forever, so why buy life insurance that will last forever? The fact is that your needs will change over time, so you should own insurance that could change as well.

Thus, the most efficient approach to buying life insurance is on a temporary (term) basis. These could be for periods of 5 or 10 years each. These policies only pay a death benefit, but they are significantly less expensive. The policies can be guaranteed to be renewed (no matter how your health may change) at the end of each period (with slightly increased premiums) until you are well into your 80s. This approach -- at less cost -- allows you to review your life insurance needs at the end of each period and decide if you still need the same amount of coverage.

How To Buy Life Insurance (If You Need It) - Life insurance has become much like a commodity, so you should buy it like a commodity. That is, all policies offered by all companies -- especially the renewable, temporary type -- are essentially identical, so it is best to shop around, compare premiums and buy the cheapest one.

That does not mean you have to take the time to talk with 5 or 10 different companies in order to shop. There any number of websites that have relationships with numerous companies, and these sites can provide a spreadsheet of multiple companies offering totally identical policies. This will allow you to easily compare premiums -- which, surprisingly, will be different. It’s a little like shopping online for the cheapest ticket offered by airlines all going to the same place.

In the end, life insurance can be a simple and survivable process. The key is to make sure that you are in charge -- not the insurance company.