4 Things you Need to Know About Life Insurance

Insurance is one of the most vital aspects of financial planning. However, understanding life insurance and purchasing the correct product can be quite challenging: you need to be educated on from term to whole life, what (if any) riders you’d like to add, and how much coverage to have.

While being educated independently is a challenge in itself, you’ll likely have to find a broker, sales representative or insurance agent to help select the product that suits your needs. The additional challenge with this step is that the insurance industry has developed a reputation for misleading clients (or telling them what they want to hear) simply to make the sale; so finding somebody that you feel comfortable (i.e. trust) should your ultimate priority.

While we don’t have all of the answers to get you educated in the next 3 minutes, here are some of the considerations that you should have in mind to ensure you find the right life insurance coverage:

Evaluate personal needs

You are the only person who knows your entire financial situation and therefore how much insurance coverage you need. However, if you’re unsure, it is possible to get a rough estimate of your insurance needs simply by totaling accumulated debts, around 10x’s your annual income, and estimated funeral costs. While the vast majority of insurance agents/advisors will give you the proper guidance in this regard, a few sales representatives may attempt to sell expensive polices that you may not even need. That being the case, educate yourself on the various insurance products and how much coverage you need in order to pick the right insurance plan.

Consult with independent brokers

If you are not able to go through with the above step or simply need some help, it is advisable that you talk to an independent broker. These are usually better than those who are working for a specific company as they are able to offer a variety of options for you to choose from. This way, making an informed decision on the policy that best suits your needs becomes quite simple.

Another quick tip: you should avoid professionals (brokers or captive agents) who give recommendations on the very first meeting as this usually shows that they have really not gone through your situation thoroughly.

Know the difference between permanent insurance and term insurance

Understanding the difference between the two can help you pick the best policy. Avoid being guided by the “what if” scenario as this might steer you away from the coverage you really need. Keep in mind that most insurance companies usually make A LOT more money from whole life as compared to term, thus more effort is put towards selling the former option.

Be careful when replacing policies

It’s always a challenge when replacing a life insurance policy (which is why states require extra paperwork to be filled out acknowledging that you know you’re replacing a policy). While it may be a good decision to replace an older (possibly unsuitable) policy, it’s important that you fully understand what you’re giving up: shortening the length of coverage if you go from whole life to term, lost premiums that you’ve paid for years, possibly taxes/penalties on your cash value, and you may have higher premiums now because you were younger when you bought the previous policy. So, despite the fact that you have life insurance, it might not be a bad idea to meet with somebody and determine if it’s still a suitable product for you. If it no longer fits your situation, then shop around for other policies that do. Warning: NEVER cancel an existing policy until your new policy is in force (which is not the same as the time you fill out the application for coverage).

Finally, it is important to note that choosing one type of life insurance policy does not mean that you are stuck with it for life as adjustments can be made along the way in case any changes need to be made.

About the Author

By , on Jan 30, 2013
Andy Tenton
Andy is a 30-something New Yorker who turned his financial life around. He took charge of his finances, got out of debt, and is now working his way toward financial success. He is the publisher of WorkSaveLive.com.

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{4 Comments}

  1. I have a life insurance policy though work and it’s one of the few insurances I really appreciate. There are a few people in my life who rely on me to provide and if I were to die these people whom I love would be in a very difficult place, especially in the debt department. I feel it’s my duty to make sure that they are taken care of even if i pass, life insurance gives me that piece of mind.

  2. I’m single with no dependents. Do cats and plants count? I believe that my employer offers some super basic life insurance policy for free which I have. I’m thankful that I don’t have to worry about this financial decision yet, but it may wind up on my plate a few years down the road. Thanks for the write up.

  3. We have life insurance as part of our superannuation (retirement fund). It costs us a couple of dollars a week and is a no fuss way of ensuring we are covered should something happen to either my wife or myself.

  4. Don’t overinsure. Insurance is useful but ensure it is covering only what is needed and no more.

    In the UK if you take two policies on your house and contents and put in a claim, they will not both be met.

    Otherwise you get to the level of Goldman Sachs who were selling junk products and taking multiple insurance policies to cover themselves against the products going belly up. Which of course they did as GS well knew. Then Uncle Sam had to bail out AIG….

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