Life Insurance: Let’s Talk About It
By: Toynett N. Hall
One afternoon a stranger in a three piece suit walks into a bar in downtown Atlanta. The stranger says to a full room “I have a sure fire plan to make all of your families financially independent. The room literally closed in on him to find out more of the man’s proposition. Once the room was quiet and he knew he had their full attention, he threw his hands up and smugly said, “But somebody’s going to have to die!” Needless to say, the bar full of people lost interest. Only one man hovered near the stranger for details. That hovering spectator left with a life insurance policy covering him for $500,000. He left that bar that day with peace of mind, knowing that he just secured his family’s financial future.
As dramatic a scenario that is, most people don’t buy life insurance in a bar. If they buy at all it is usually in the comfort and privacy of their homes.
The first life insurance marketed and sold in the United States originated from the Presbyterian Synods in Philadelphia and New York who created the Corporation for the Relief of Poor & Distressed Widows & Children of Presbyterian Ministers in 1759. Their goal was pure and simple, to provide money for the survivors of the deceased.
Purchasing life insurance can be a daunting task for anyone. The questions one should ask themselves are: Who depends on me financially? What are the debts and obligations that need to be paid in the event of my premature death? How much coverage is enough? What kind is the right kind? Should savings be attached or separate from the policy? How do I know the company I choose can pay out the claim?
Anyone who is not “self insured,” meaning someone who has accumulated enough assets whether it be in stocks, bonds, or other investments, that can weather the loss (cover all debt, obligations, final expense ) of a financial partner (spouse, breadwinner, business partner) needs life insurance.
Ultimately the main reason for life insurance should be to protect a family against the premature death of the breadwinner. You’re paying for a substitute of income.
When it comes down to figure out how much is enough the general rule of thumb is you should own (coverage you pay for not associated with a job) about five to 10 times your annual income. This figure should take into account your lifestyle, assets, and debt load.
Now, when determining what type of life insurance should be bought, one should consider the advice of world renowned personal finance expert, Suze Orman. According to Orman, “Life insurance was never meant to be a permanent need. It is there to protect a family during the years that they have the highest responsibility.”
In other words your needs change during the course of your life. When you have small children, a mortgage, and lots of debt that is the period of time when you are at the most risk. Therefore you need a large amount of insurance protection for that period of time. The only insurance that can be bought for a nominal fee and offer a large amount of coverage for a specific amount of time is a “TERM” product.
Other products that offer fancy bells and whistles and combines an investment portion in with your policy is the wrong product. Keep in mind that life insurance is protection for your family in the event of your premature death, and savings is established to provide some form of income in retirement. Combining these two financial instruments (which is found in cash value and universal life policies) is typically bad for the consumer.
For instance, the premiums for cash value policies are higher for the same amount of coverage, often times the investment portion in these policies yields a lower rate of return, to access the cash from your policy you have to borrow against your own money, and borrowing from your policy reduces the face amount available at death.
In lay men’s terms, since you can’t live and die at the same time, it’s best to keep those financial vehicles separate.
When seeking a company to insure your family, you should look at the company’s history and performance. This will tell you whether or not they pay their claims. Some institutions designed to help consumers investigate are A.M. Best, the oldest and most prominent rating agency in the industry; the American Council of Life Insurers, and FINRA the Financial Industry Regulatory Authority.
Life insurance is the basic foundation to anyone’s financial house, without it, it’s as if you built your house on quick sand. If you look at it, really scrutinize it, you realize it’s never really the money that buys the insurance, ultimately it’s your health.