Friday, November 26, 2010

Life Insurance Primer. Part Five: Concluding Remarks

This is the fifth and final installment of my series of articles on life insurance.  Here is a quick summary of the previous articles:

Part One:  Introduction

Part Two:  Term Life Insurance

Part Three:  Whole Life Insurance

Part Four:  Universal and Variable Universal Life Insurance

There are a couple of final points that I want to make regarding buying life insurance:

1. Make sure you are comparing apples to apples:  Even with term life insurance, there are different term lengths.  The longer the term length, the more expensive the policy will be.  A one year renewable term will have the lowest rate, at least initially.  However, after a year, that rate will rise when the policy renews.  However, with a 20 year level term policy, the rate you are quoted will be the rate you will pay for the next 20 years.  If you opt for a short term policy and you plan on keeping the policy after it renews, you will want to inquire what the renewal rates will be.

2. Any quote that you get will be for the company's best rate:  Insurance companies go through a process of underwriting.  Depending upon the company and the size of the policy, insurance companies will request medical records, perform tests, take blood, and possibly do a host of other things.  The purpose of all this is to determine what type of insurance risk you are.  Obviously, if you have some risk factor which is more likely to lead to your death, the higher your actual premium will be.  Only a fraction of the overall population will qualify for a company's best rate.

3. Consider the company's financial stability:  When you buy a life insurance policy, hopefully it will be a long time before the company has to pay the claim.  However, if and when that time comes, you will want to make sure that the company will be around.  Based upon recent events, it is not beyond the realm of possibility that an insurance company might not be around decades from now.  There are several independent rating agencies which rate insurance companies based upon their claims paying ability.  Generally, it is a good idea to stick with a company that is highly rated by multiple agencies.

4. Consider how much insurance you need, both now and in the future:  There are many rules of thumb regarding how much life insurance that a person needs.  I urge readers to seek out this information so that they buy a policy that is appropriate to their need.  You might think that it is better to under buy now because you can always buy more later.  Unfortunately, that may not be the case.  You may be diagnosed with some ailment with makes life insurance very expensive.  Even worse, the condition might make you uninsurable altogether.  Therefore, if you are in good health now, you should consider buying what you think you might need now, rather than waiting.  The other advantage of buying what you need now is that, even if you remain in good health, insurance premiums rise with age.

5. Don't neglect a non-working spouse.  Some people might not buy life insurance on a non-working spouse because, well, they aren't working.  People think that if somebody doesn't work, there is no income that needs to be replaced if they die.  However, consider that if a non-working spouse dies, the working spouse now may have to pay for child care, elder care, or other items that were handled by the non-working spouse. 

Finally, here is a final summary of the different types of life insurance in one handy table:

1 comment:

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