When buying insurance, you can be overwhelmed by an information avalanche. To protect your future from poor choices today, organize your insurance search by reaching back to grade school and employing the use of the 5 W's: 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 Certified Public Accountants for 27 years, this group not needing insurance 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 dry. 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."