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When buying insurance, you can be overwhelmed by an
information avalanche. To protect your future from poor choices
today, organize your insurance search by employing a few simple
questions: Who? What? Where? When? Why? and How much?
Who?
The classic argument to avoid life insurance runs, "If I die,
why do I need money?" You don't -- but your family, your business
or your favorite charity might. So anyone with dependents, human
or otherwise, might need life insurance.
Of course, if you don't need to protect anyone else,
insurance is not a wise way to spend money.
According to Steve Kramer, who has served on the members'
insurance and benefits committee of the California Society of CPAs
for 27 years, this group includes people who have raised and educated
children now living independently, folks who have accumulated sufficient
assets to support a surviving spouse, and the single elderly (and
not-so-elderly) population.
What?
People approach life insurance with predisposed
notions, says Rory Roniger, CLU, ChFC, head of the
financial services arm of the Eustis Insurance Group
in Metairie, La.
"They might be oriented to term insurance yet
don't have a good argument as to why," he says.
"Any kind of insurance is a contract with requirements
on both sides," says Dave Evans, CFP. "Unfortunately,
too many people think life insurance is a commodity, like going
to the grocery store and picking up a piece of fruit to judge."
"Term" insurance forms the base of every
life insurance policy. Think of it as renting a safety net: The
owner pays a fixed premium toward a concrete payoff over a specific
time. If you die during this period, the insurance company pays
the promised amount. When the policy reaches its deadline, the coverage
vanishes.
Lawrence Wentz, who owns the Kindt, Kaye, and Wentz
agency near Philadelphia, says that contracts aren't that cut and
dried. Many companies sell term policies that guarantee a rate for
only 10 years of the protection. A few providers guarantee just
a year at the starter rate.
After the secured period ends, the company can charge
one of several rates filed with the state insurance commissions.
Speaking of rates, start by assuming the initial quoted
rate for your age and life circumstances is too low.
"I've placed people of all age ranges, and not
many get this thoroughbred rate after the physical exam and application
submission," Wentz says.
The good news: Changing health status during your
term limits doesn't affect premiums or payoff. The rub comes when
that contract ends. Many companies allow you to buy another policy,
but at higher rates to balance your changed health status.
Some insurers offer convertible policies that allow
a return client to take out another policy at the rate of a healthy
person, but you pay a higher premium for the privilege.
Insurance companies also offer three variations of
permanent life insurance -- that is, insurance that covers you for
your entire life.
Whole life offers term insurance's set payoff for
a set premium, except this policy doesn't come with an ending date.
You'll pay the premium for the rest of your life, unless you decide
to cash in and receive the cash value as a lump sum.
According to the Life and Health Insurance Foundation
for Education, "the cash value of a policy is different from
the policy's face amount. The face amount is the money that will
be paid at death or policy maturity. Cash value is the amount available
if you surrender a policy before its maturity or your death."
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