The process of purchasing life insurance involves thinking about one's mortality. It's a 'necessary evil' for most. Before committing to a long-term financial obligation such as the purchase of a life policy, I suggest following a simple process in order to achieve the desired result of proper coverage at a competitive price.
Step 1, Determine The Right Amount
Picking a nice, round number out of 'thin air' is not advisable. There are many 'rules-of-thumb' that have to do with multiples of income. While this may provide a very raw guide, I find 'rules-of-thumb' don't work, and your beneficiaries probably deserve a little more thought. In today's dollars/values, consider things like paying off the mortgage, estimating college costs, paying off any debts/loans, and establishing an emergency reserve account. Once these obligations are covered consider an additional amount to provide ongoing income to your loved ones (i.e. $500,000 of death benefit, will provide $25,000 of annual income assuming a 5% rate of return). Next, subtract from the total the resources that currently exist and would be converted to cash in the event of a death. Things like savings accounts, brokerage accounts, college savings accounts, and retirement accounts of the deceased are typical resources that could be used. The net amount will not only be a fairly accurate estimation, but there is now a guideline to the beneficiaries as to how the death benefit proceeds should be spent.
Picking a nice, round number out of 'thin air' is not advisable. There are many 'rules-of-thumb' that have to do with multiples of income. While this may provide a very raw guide, I find 'rules-of-thumb' don't work, and your beneficiaries probably deserve a little more thought. In today's dollars/values, consider things like paying off the mortgage, estimating college costs, paying off any debts/loans, and establishing an emergency reserve account. Once these obligations are covered consider an additional amount to provide ongoing income to your loved ones (i.e. $500,000 of death benefit, will provide $25,000 of annual income assuming a 5% rate of return). Next, subtract from the total the resources that currently exist and would be converted to cash in the event of a death. Things like savings accounts, brokerage accounts, college savings accounts, and retirement accounts of the deceased are typical resources that could be used. The net amount will not only be a fairly accurate estimation, but there is now a guideline to the beneficiaries as to how the death benefit proceeds should be spent.
Step 2, Determine the Type
There are two basic forms of life insurance, term and permanent. I subscribe to the philosophy of covering temporary needs with Term insurance and permanent needs with whole life insurance. Things that are temporary in nature are needs that, at a certain point in time, will not exist. For example, after the kids graduate college, the need to provide a death benefit for that piece evaporates (unless they live at home for a while after graduation). Things that are permanent in nature are providing funds for funeral expenses and establishing an emergency reserve account. Once you have an idea of the mix of term and whole life, get some quotes.
There are two basic forms of life insurance, term and permanent. I subscribe to the philosophy of covering temporary needs with Term insurance and permanent needs with whole life insurance. Things that are temporary in nature are needs that, at a certain point in time, will not exist. For example, after the kids graduate college, the need to provide a death benefit for that piece evaporates (unless they live at home for a while after graduation). Things that are permanent in nature are providing funds for funeral expenses and establishing an emergency reserve account. Once you have an idea of the mix of term and whole life, get some quotes.
Step 3, Determine Who You Want to Work With
Online or with a human being face to face. Some things that can be purchased online are less expensive than their 'store front' siblings, however life insurance is not one of them. All life insurance policies are filed with the various state's insurance commissioners. The premiums are the same whether you buy online or face-to-face with an insurance agent. Online may put the buying in control more, and you may not have a 'pesky' agent calling you every day. However, if you'd rather have a local agent consider asking the following:
Online or with a human being face to face. Some things that can be purchased online are less expensive than their 'store front' siblings, however life insurance is not one of them. All life insurance policies are filed with the various state's insurance commissioners. The premiums are the same whether you buy online or face-to-face with an insurance agent. Online may put the buying in control more, and you may not have a 'pesky' agent calling you every day. However, if you'd rather have a local agent consider asking the following:
1) Any professional designations? Initials after a name doesn't necessarily make an agent smarter or better, but it does show that they're committed to being a professional in the business.
2) How many different companies/firms have you worked for in your career? Look for stability
3) Can you sell all companies or are you 'pushed' to sell a primary company?
2) How many different companies/firms have you worked for in your career? Look for stability
3) Can you sell all companies or are you 'pushed' to sell a primary company?
Step 4, Application and Underwriting
Get ready for a ton of paperwork, and a 6-10 week underwriting process....longer if you buy 'cheap term' insurance. Most underwriting departments are under-staffed, and the companies that offer very low-cost term insurance, simply don't have the extra revenue afford a decent quantity of quality underwriters. In fact, some companies are now outsourcing some of their underwriting services overseas.
Get ready for a ton of paperwork, and a 6-10 week underwriting process....longer if you buy 'cheap term' insurance. Most underwriting departments are under-staffed, and the companies that offer very low-cost term insurance, simply don't have the extra revenue afford a decent quantity of quality underwriters. In fact, some companies are now outsourcing some of their underwriting services overseas.
Lorin Greber, CFP, ChFC is a financial advisor with Financial Balance Group, LLC in Rockville, MD working with small business owners, professionals & affluent retirees across the country. In today's economic environment, his focus on utilizing whole life insurance as a planning tool makes sense for clients looking to build real wealth.
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