While on the subject of life insurance, here are a few “other” things you should know because, well, life insurance can be:
- wasteful if not planned correctly
- full of potential conflicts of interest
- did we mention boring?
- and full of subjects, like death, we’d rather not deal with.
Fact: Many people don’t purchase enough life insurance to cover their needs.
Fact: Of those that do, many end up making critical mistakes and buying insurance that is not optimal. This is a good reason to work with an insurance company close to you in Grapevine, Fort Worth, or Dallas and to develop a strong relationship with your agent.
Fact: According to the Life Insurance and Market Research Association, more than 30 million Generation X and Y households surveyed in 2012 reported that they needed more life insurance. One-third of wives own no life insurance at all.
Fact: The same survey found that most of people believe life insurance gives them a “peace of mind.” Of those who have had a positive experience with life insurance, 80 percent indicated that the life insurance industry plays a “critical role” after the death of a loved one.
Fact: Americans are confused about insurance. Several insurance organizations have found that the main reasons people don’t buy insurance is because they believe they can’t afford it and they have other financial priorities.
Fact: Surveys also have shown that consumers seriously overestimate the cost of life insurance by as much as threefold, which is another good reason to work with an insurance company or agent in Grapevine, Fort Worth, and Dallas.
Fact: Consumers don’t know what to purchase. Of those surveyed in various polls, 12 percent (or more, depending on the poll) couldn’t decide what type of life insurance to purchase, more than 10 percent were concerned about making the wrong decision and simply gave up because of a lack of knowledge about insurance.
Remember the Basics and a Few Other Thoughts
- Determine whether or not you need life insurance. If you are young and without dependents, you may not need life insurance. If you plan on having dependents, it can be a good idea to buy insurance when you are young. By doing so, you guarantee your insurability (as long as you continue to pay the premiums). Talk about this when you meet your insurance agent.
- Don’t fall for the argument that you should buy insurance when you are young just to lock in a low premium. Premiums are determined by your age, gender and risk classification. A disadvantage to buying insurance when you are young is that you will likely be paying premiums over a longer period of time.
- You may no longer have a need for life insurance if you are older with no dependents, have saved enough to provide for the needs of yourself, your spouse or partner and don’t wish to leave a legacy.
We’ve recently discussed how much life insurance you need, but to just to refresh . . . there are two ways you can calculate how much insurance you need:
- Income replacement: This approach considers your age and earnings. It generally produces a higher number than a needs-based approach. You start with your age and determine how many years of income you would need to replace in the event of your death. For example, if you are 40 years old, you might decide to buy insurance that would pay 15 or 20 times your yearly income. Some calculations using this approach take into consideration your projected after-tax earnings over your working years, factor in inflation and discount the results to present value. The basic problem with this approach is that it’s not very individualized.
- Needs-based: This approach considers your particular situation and assesses the impact of your death on your dependents. Factors to consider include whether your spouse or partner would continue or start to work, the number of children you have, whether there is a mortgage you want to pay off and the cost of educating your children.
Many insurance agents or insurance experts prefer a needs-based approach, but it will take more time and reflection to get it right. It’s very helpful to meet with your insurance agent in Grapevine, Fort Worth, or the Dallas area periodically to go over your needs and changes in your life situation. This is often forgotten by policy holders and ignored when they receive the “Hey let’s get together to review your policy” email update reminders.
We’ve also discussed the type of insurance you need. The two basic types of insurance are term and cash-value insurance (which is also referred to as permanent insurance).
- Term insurance has no investment component. You just decide how much coverage you need and the period of time you want that coverage to remain in effect. You can obtain term insurance that has a level premium over the term of the policy. Term insurance has lower premiums than cash-value insurance. Many insurance specialists, estate planners, and financial planners recommend buying term insurance and investing the difference between a term-insurance premium and a cash-value premium. Unfortunately, most people spend the difference and do not do this. Nevertheless, for those with young children, term insurance will provide the most coverage for the lowest premium. By the end of the term, your need for insurance may be reduced or eliminated.
- Cash-value insurance is one of the most confusing subjects in personal finance. It can be an excellent product, but it’s difficult to understand and is a subject worth spending time with your insurance agent in Grapevine, Fort Worth, or the Dallas area to understand. Some insurance salespeople use its complexity to their advantage and attempt to sell high-commission policies when other policies would be more suitable. Be aware of this behavior.