“OK, class, today we’re going to cover life insurance. This is one of the more important yet misunderstood … Class? Gang? Hello, is this thing on?”, I said, every time I approached this topic, tapping my white board marker as if it were the microphone and I was the failing stand-up comic.
I get it. I don’t want to talk about it either — as a consumer. But as a financial educator — I do, I do believe in life insurance.
Why Don’t We Want to Talk about Life Insurance?
This entire post and the book sequel could be based on this question alone. Let’s look at this and then connect it to practical steps towards getting (or not) covered.
- It’s hard enough to think about our future alive self when it comes to money not to mention our not-living self. This is part of the reason why it’s hard to save, reel in spending, manage credit score, avoid huge car loans at 21 years old, make smart decisions about education and borrowing, etc.
- Talking about life insurance means that at some point the word death or dead or deceased will have to be used in a sentence to describe yourself or someone you care about. Yuck.
- Culture, family history, and personal preference lead many to flat out not believe in life insurance.
- Fear of the pushy salesperson. Hey, I used to be one of those guys! Of course, I wasn’t pushy. This is a real thing as the art of selling life insurance too often takes precedence over whether someone actually needs or wants it.
- Confusion! There are several different types of life insurance and what feels like 100s of companies. I wonder… If life insurance were required by law like car insurance, would companies resort to marketing it with strangely named animals?
- It’s an expense, and it’s an expense for something we can’t benefit from ourselves.
- It is (usually) costly, depending on type, need, health, etc.
Now Can We Talk about It? A Few Things to Know about Life Insurance
Understand Need: The fundamental question, right? Do I need life insurance? This is where our values come into play, possibly more than our finances. Personal finance folks like myself focus on the facts, but it is ultimately a personal and sometimes emotional decision to buy life insurance. In terms of those facts, the need for coverage can be based on several factors:
- Is someone dependent on your income?
- Is there a particular debt you would want paid in the event of your passing?
- Is there a specific cause you would want to benefit?
- Do you simply want to leave a person or persons a pile of cash to enjoy?
- Do you want the peace of mind of knowing that some or all of these needs are at least partially addressed through life insurance?
How Much to Buy? A good sales representative will help you through an objective analysis which considers income replacement, debt, education costs, charitable considerations, tax implications, etc. For example:
- Amount based on an income multiplier like two-, three-, or four-times annual salary.
- Amount based on debts to be covered such as a mortgage.
- Amount based on how much to leave to a certain person or organization.
- Amount based on affordability.
- A combination or sum of the above.
What Kind to Buy? This is where is gets…oh, what’s the right adjective? Is there a list of adjectives to describe life insurance options? I’m going to say sticky – in my mind that is a combination of tricky and intimidating. What adds to the stickiness is that there are a lot of opinions on this subject. The best you can do is learn about the different types, get further advice from an insurance professional, financial planner or counselor, then make an informed decision. The major players:
- Term Life: insurance for a specific number of years, (10, 15, 20, etc.).
- Relatively inexpensive compared to other types
- Use it or lose it. No cash value.
- Possible to renew or extend at a new rate depending on health.
- Whole Life: coverage for a price all the way until age 99.
- Much more expensive than term.
- Builds cash value which can be stored, borrowed, or become part of death benefit.
- Variable Life: offers insurance and the chance to build cash through various investments options.
- Often thought of as a hybrid of term and whole life.
- Permanent, lifelong coverage.
- It can build cash but the only guaranteed part is the death benefit as investments can fluctuate in value.
- Universal Life: has features of whole and variable life policies but also can offer flexibility in terms of coverage and premiums.
- Permanent, lifelong coverage.
- Flexible, but the pure insurance piece is more expensive compared to term.
- Investments not guaranteed and a drop in value can cause a policy to lapse.
- Complicated product.
- Employer-based or Group Coverage: sometimes part of an employee benefit package which can provide relatively inexpensive coverage based on salary.
- Not portable – no coverage once you leave that job.
- Declining Balance Term: the death benefit mirrors your mortgage balance, so as the mortgage is paid, the insurance benefit declines (towards zero).
- Relatively inexpensive way to provide peace of mind that your home would be paid for in full in the event of your death.
Or Just Live Forever
As with any kind of insurance, it comes down to a cost/benefit analysis, looking at what we need vs. what we want, how much risk we want to retain, and in this case, what others need and want. It’s easy enough to get online quotes on life insurance, but here are a few final things to consider:
- Get a recommendation for a licensed agent from someone who understands your values and has had a positive experience with that agent.
- Research the company in terms of their service and financial strength.
- Understand that depending on the type and amount, a medical exam might be required.
- If you buy life insurance make sure to identify the beneficiary or beneficiaries.
