A recent study (1) found that while 70% of people believe they need life insurance, only 59% actually own it. Why the behavior gap? What’s keeping these people from doing what they know is best for them?
Buying life insurance is confusing! With so many options available, many people don’t even know where to begin, and the specialized terminology is simply overwhelming. If you’re looking to buy life insurance and have no idea where to start, you’ve come to the right place.
Determine Your Goal
The first step in buying life insurance is figuring out why you want to buy it in the first place. As Simon Sinek tells us, we need to start with why. What are you trying to achieve through life insurance? Here are a few questions to consider:
- Do you need insurance to replace your income and support your family?
- Do you want insurance to cover your funeral and burial expenses?
- Does your insurance have to fund your spouse’s retirement?
- Do you want insurance to pay for someone’s college education?
- Do you need insurance to pay off the mortgage on your family home?
- Do you want insurance money so it can go to charity?
- Do you want insurance for estate planning purposes?
- What needs must your life insurance cover in order to give you and your family security and peace of mind?
In answering those questions, you can uncover your goal, your purpose behind buying life insurance. Not everyone has the same goal, which is why there are so many options available. Once you determine what you are trying to accomplish, that will dictate how much insurance you need and for how long you need it.
Know Your Options
There are three main types of life insurance:
Term Life Insurance
Term life insurance is the simplest and cheapest, but it is also temporary. You purchase coverage for a specified amount of time and the insurance company only pays if you die within that period of time. If you don’t die, all you get in exchange for your premium payments is peace of mind. Term life insurance is a good option if you only need temporary coverage, such as until the mortgage is paid off or the kids are out of the house.
Convertible Term Life Insurance
Convertible term is the insurance described above but with the option to convert it to permanent insurance of the same value. If you choose to convert, you won’t have to go through underwriting again or have a medical exam, but you are limited in when you are allowed to convert. Most policies no longer allow you to convert once you reach age 65. Convertible insurance is usually more expensive than simple term because it offers more flexibility and options.
Whole Or Permanent Life Insurance
Unlike term, whole or permanent life insurance lasts until your death, no matter how long that takes. As such, you are guaranteed a death benefit as long as you continue to pay your annual premium. Your premiums and policy do not change as long as you keep them current.
Whole insurance is more complicated than term because it incorporates an investment element. In addition to the fixed death benefit, it has a cash value that builds over time. You can also borrow against the cash value during your lifetime. This is the most expensive insurance because it is the only one that guarantees a death benefit and some of the money is invested for the cash value.
There are two variations of permanent insurance where the cash value does not increase at a fixed rate: universal and variable. Universal life insurance is more complicated and flexible. Both the premium and death benefit can vary depending on your specific financial needs at the time. The cash value is also tied to the market, so there is no guaranteed rate of return.
Variable whole life is the most hands-on form of life insurance. It is like universal insurance, except that you, the policyholder, are responsible for the investments, not the insurance company. This brings with it greater risk and also greater potential for reward.
Understand The Fine Print
There are a few key things that you need to remember when buying life insurance.
1. Life Insurance Is A Contract
It is not an item that you buy through a one-time transaction, like a car. It is an agreement where both you and the insurance company promise to fulfill an obligation. As such, you should make sure the insurance company is reputable. Also, make sure to read the contract. Don’t sign anything without understanding it.
2. Life Insurance Is A Product That Gets Sold
That means that the person offering you life insurance isn’t doing it just to be nice. It is their job to sell insurance and their financial well-being depends on their ability to get you to say yes. They are acting in their own best interest, not necessarily yours. While there are good, trustworthy insurance salesmen out there, there are many who are not.
3. There Is A Difference Between Insurance And Investments
While whole life insurance offers an investment component, insurance is primarily designed to protect you against something while investments are designed to build wealth. There are many investment vehicles available, and life insurance may not be the best one. Any rates of return presented to you when buying universal and variable policies are hypothetical and not guaranteed.
Seek Professional Help
As you can see, life insurance really is complicated. There isn’t any one-size-fits-all answer, no matter how much we wish there were. The best policy for you depends on your specific needs and financial situation. And you need to know a lot about insurance to recognize which policy is best given your situation.
Because of this, it’s a good idea to work with an experienced professional. You need to be careful, though, that the professional is really there to help you and not just sell you a product. At Newbridge Wealth Management, we can give you unbiased counsel because we do not sell life insurance. We have no reason to recommend one product over another unless it is truly in your best interest. If you need help finding the best insurance policy for your life, email us at vincent@newbridgewealth.com or call 610.727.3960 to schedule a meeting and we can walk you through the entire process.
About Vincent
Vincent R. Barbera, CFP®, MSFS is a managing partner and co-founder of Newbridge Wealth Management, a private financial counseling firm located in Berwyn, Pennsylvania. Believing in a patient, disciplined approach to investment management that delivers value and peace of mind, he utilizes a process-driven approach to financial planning that provides comfort and clarity to his clients’ long-term goals. Along with a bachelor’s degree in psychology and business, he has a master’s degree in business and financial planning and Certified Financial Planner™ designation. Learn more by connecting with Vincent on LinkedIn, or send him questions at vincent@newbridgewealth.com.
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(1) http://theasagroup.com/wp-content/uploads/2017-Insurance-Barometer_FINAL.pdf
