Although most adults have heard of it, few seem to understand exactly how life insurance works or is supposed to work. To an extent, this is because the industry is shrouded in mystery. Those tax collectors extraordinaire called “Congress” are always targeting this highly tax-sheltered industry, for one thing. For another thing, life insurance is rather like oxygen: you never think about it until you don’t have any access to it, and you may find it hard to understand why anyone should make you pay for it. Life insurance agents often say that selling life insurance is like selling air, too: they have nothing tangible to offer the person who buys it. Cash value life insurance was created in large part to address this hazard, but it’s still basically the same. It’s called life insurance, but it only pays when somebody is dead.
So, in light of that, it can be hard to pick a decent policy. Here are 10 tips for knowing how to be assured that you got something good for your premium dollars.
1) Do you know if you really need coverage? Now, granted, there are more people without life insurance who need it, than there are those with it who don’t. But, still–how do you know? The life insurance industry has a conflict of interest: it often tries to sell (more) insurance to those who don’t need it. There are simply too many agents who work on commission. So–how do you know if you need coverage? Essentially, you need coverage if you are still building your fortune. Life insurance is foremost a bridge between the risks of starting out financially and becoming what they call “self-insured”. If you have a net worth that is at least eight to ten times your annual income, and you have a typical sized family (a spouse and one to three children), you likely don’t need life insurance. So, if you make $60,000 a year and you are worth at least $480,000 to $600,000, you want to have a serious talk with a financial advisor to see if you truly should have coverage. (You still might, but it gets complicated.)
2) You need to select the right type of life insurance. There are so many products out there now that you can easily tailor a financial plan, which typically includes life insurance, to suit your specific situation. Don’t get sold by an agent looking to make a hefty commission. Just pick what you need. Again, talking to a broker can work wonders here.
3) How much life insurance is enough? As alluded to above, probably eight to 10 times your annual income. That may sound extreme, but you’re going to want above all other things income replacement for your left behind loved ones. That amount can be mostly invested while also paying off expenses.
4) You need to select the right features for your policy. This might vary from person to person, but the cardinal rule is: be highly skeptical of riders. You probably don’t need one.
5) Avoid getting scammed. The greatest life insurance scam is churning: an agent from your company sells you a new “free” policy that is financed by cash value from your already in-force policy. Yeah, right. Other scams might include selling you on an increasing premium term policy that starts off cheap, but churning is the biggie.
6) When picking an agent, always start with the big-name companies. But also consider brokers. And meet with a handful before you go with one. Non-brokers want to sell you on the very first meeting. Remember that.
7) When preparing for your medical exam, you probably don’t want to drink alcohol or eat a heavy meal within 24 hours of the exam. Drink plenty of water and eat filling but balanced foods. Avoid lots of sugar and high fat contents, too. If you are sensitive to caffeine, avoid that for a day or two before, too.
8) If you want to challenge your medical exam’s results, try to find some discrepancy between the parameds and what your doctor says. “If we’re given both a paramedical lab result and that same test done in a customer’s physician’s office, we’d give more credence to the physician every time,” are the words of Dr. Robert Watson, secretary and treasurer of the American Academy of Insurance Medicine, a man who works with life-policy underwriters.
9) If you closely examine your policy and do some research once you have one, you may find it’s not suited to you. If it’s in the first 30 days of the policy you have a right of recision for a full refund. To get rid of a policy you can simply stop paying the premiums. Contrary to belief and some shady practice, collection agencies cannot try to make you pay for a policy you stop paying on–you simply lose coverage. If you try to surrender or stop paying on a policy, if you got it through a single company (not a broker) an agent will come to try to save the policy. Keep that in mind. You’re also allowed to get replacement coverage, which requires a great amount of paperwork on an agent’s part.
10) So–what’s the best life insurance for you? In normal circumstances, either term life or variable universal life. If you have special circumstances, consult a broker or your trusted agent, but otherwise don’t let anybody sell you different.