In the beginning, I mentioned the need for a strong offense and a strong defense. Most of what I have discussed up to this point has been on the offense side, which is the building of assets. Now, let’s discuss defense.
If you had a decision to make that could potentially cost you hundreds of thousands of dollars, would you get a second opinion? A majority of people would probably answer that question with a “yes.” Yet, you’d probably be surprised to learn that even people who ordinarily would shop for a television, car or other expensive items usually don’t shop at all when they buy life insurance.
First, if you don’t have anyone depending on your income and no one would be harmed financially if you were to die, then you probably don’t need life insurance. This is obviously not the case if you have a spouse, children, parents or anyone else depending on your income. Under those circumstances, it’s wise to have an appropriate life insurance plan in place to take care of your dependents should something happen to you.
In my opinion, there are two fundamental categories of life insurance policies. They are term insurance-type policies and cash-value-type policies.
Term insurance has been called pure protection, because it has no savings portion attached to it, as does cash-value insurance. If you die and have term insurance, your beneficiary gets only the face value of the policy.
You still need to shop around, however, because rates for and types of term insurance can vary quite a bit.
The alternative to term insurance is cash-value insurance, which is insurance with a built-in savings plan. Many types of cash-value products have been available over the years. A couple of these types of plans are whole life and universal life.
In most if not all, your excess premium dollars (monies you paid that weren’t needed to pay for insurance costs and expenses) were invested with that particular insurance company. These policies have historically offered very poor returns. Because of this, they weren’t good for the policyholder.
There is however, a relatively new (by insurance industry standards) type of cash-value insurance on the market called variable universal life insurance or VUL. Most of these plans have numerous investment choices that you can switch around, (usually without a charge), such as stock, bond or money market sub-accounts. These mutual fund-like sub-accounts give VULs the opportunity to earn returns that have seldom been seen in other permanent life insurance plans. Be aware however, that since the insurance company doesn’t guarantee the cash value that supports the VUL insurance, it’s possible to lose money on the investment portion.
From my experience, most people would be better served by buying term insurance and investing the money they would save over cash-value insurance. With a little bit of investment knowledge, most people can get a better return on their investments than they can with most cash-value insurance policies.
It’s normal for an insurance company to require that you to pass a physical before issuing a policy. But make sure to get a policy that doesn’t require any other physicals after the initial one for the duration of that policy and for all renewals.
Otherwise, if you’re asked to take physicals at the insurance company’s discretion, the onus of staying healthy so you can stay insured rests with you. And let’s face it, if you knew you were always going to be healthy, you probably wouldn’t need the insurance in the first place.
Also, keep in mind that all life insurance contracts are subject to insurance costs and other charges. These costs and charges are the basis for comparison when shopping for insurance. Also, be sure to check with a good insurance rating service to make sure the insurance company is financially strong. And if you’re thinking about replacing your old insurance policy, never cancel your old policy until the new one is in force.
If you determine that you need life insurance, you should do it as soon as possible. Waiting to buy the right life insurance plan can be a mistake because the older you get, the more it will cost you. More importantly, if you become uninsurable while you’re waiting, it can’t be purchased at any price. Someone once said, “Life insurance is like a parachute, if you ever need it and don’t have it, you’ll never need it again.”
Tags: investment advice, financial advisor, retirement planning, financial advice, personal finance, life insurance