Here a few things to keep in mind when you’re making decisions about life insurance:
The Beneficiary’s Interests Are Primary. Don’t make the mistake of thinking that the insured person – the one whose life is insured – is the one who should call the shots in buying and owning life insurance. Life insurance is there to protect the beneficiary and it’s the beneficiary’s needs and interests that should be considered above all others when making decisions about life insurance.
The Beneficiary Should Control the Coverage. There are four parties to a life insurance contract: the insurer, the insured party, the beneficiary and the owner. It’s the owner who controls the policy, and not the insured party, as many seem to mistakenly believe. Since the insurance exists to serve and protect the interests of the beneficiary, the beneficiary should have control. That means that, wherever possible, the beneficiary should own the policy. I have seen too many cases where an insured person, who also owned the policy, cancelled the coverage without the consent of the beneficiary, and against their wishes. That’s a risk that beneficiaries should seek to avoid.
You Might Not Need Life Insurance. Life insurance should be there to meet a need. A need exists if three things are true: 1. An early death occurs, 2. A financial need is created by, or continues from, this early death, and 3. This financial need will be unmet by other resources. Unless all three of these conditions are true, there is not a need for life insurance. Life insurance agents and others often overlook number three when considering the need for insurance, and it is often the case, in my experience, that financial resources, other than life insurance, will meet some or all of the need.
The Need for Life Insurance Should Diminish. There is nothing insurance companies like less than carrying a liability for a life insurance payout on an insured party who has a short life expectancy. Term insurance – where you pay for insurance as you go – becomes unobtainable or unaffordable as the insured party’s life expectancy gets short. Permanent insurance is designed to pay the benefit with your own savings by the time the insured party is expected to die. In other words, it is impractical to plan to continue to carry and pay for significant amounts of life insurance into an insured party’s twilight years.
Guarantees are Key. When you buy life insurance, you are paying for at least one guarantee: a guarantee that if a death occurs, then a payment will be received. But there are other guarantees that are worth considering, too. You should consider guarantees that you may continue the insurance for a specified period of time, that the exact amount of the death benefit is known, and that what you will, from the beginning, exactly how much you will have to pay for the insurance to be highly valuable when assessing coverage.
Term Insurance Is the Benchmark. Term insurance, in its most basic form, is pure insurance. You pay a premium to cover a specific period of future time, or term, and in exchange for that premium, the insurer promises to pay a specified amount of money to the beneficiary if the insured party dies during that term. It’s simple, easy to understand, and almost always the least expensive way to buy life insurance. For these reasons, term life insurance should be the benchmark against which any other alternatives are compared.
Find a Reliable Source. Life insurance is only as good as the insurer’s promise to pay. You should only consider purchasing life insurance from a source that is highly likely to be able to keep that promise. Choosing life insurance based primarily on price is a risky thing to do, since you’ll find that, when it comes to term insurance, price and quality go hand-in-hand. Your screening criteria for life insurance should be the size, financial strength and history of the insurer, in that order, followed by price. So price is the fourth thing to take into account when considering life insurance.
Don’t Trust an Insurance Agent. Insurance agents work for insurance companies, not for you. Their job is to maximize the revenue of the company they work for and, in turn, their own income. No matter what they say, their interests are in direct conflict with yours. Their gains always come at your expense. Think of them as you do a cashier at a fast food joint: they are there to process a transaction, but not to tell you what, or how much, you should eat.
Shop Around. Allow a couple of months to compare the options available to you, including coverage available to you through FEGLI, membership organizations and the retail market, before you commit. You’ll find everything you need to shop online, including online brokers who will provide you with quotes through their websites. It’s never been easier to see and compare what is available, and particularly when the insured party is over age 40, a little diligence is worth the effort.
Written by Mike Miles
For the Federal Times
Publication September 12, 2016