9 Things Everyone Should Know About Life Insurance

As many families re-examine their finances and re-assess their financial objectives we want to provide you with a list of the nine things everyone should understand about life insurance and know before purchasing a life insurance product.

#1) There is no magical formula or number as too how much life insurance you need if anyone tells you that you need 5, 6 or 10 times your annual salary than tell them to return their 1980 sales manual. The truth is that your needs will change over time and every families needs are different. There are numerous factors that should be considered in determining a suitable amount and those factors should include sources of assistance such as social security survivor benefits and more.

#2) Too many needs and not enough income. Let face the reality, that if you allow a salesman to sell you, than inevitably you will end up with a product that does not meet your protectionary needs, is too expensive and ultimately benefits the salesman’s pocketbook more than it benefits your family. The reality is that each of our families has numerous financial needs to prioritize including our ongoing expenses, debt reduction, medical costs, education savings, retirement savings and everything else; just as you shop around for a new car or auto insurance, you will be best served by taking every measure to reduce your insurance costs while maintaining adequate coverage.

#3) Types of Life Insurance: Just as with most financial products there are numerous forms of life insurance and product provisions can vary greatly from company to company. Term Insurance, by far, provides the lowest cost of insurance but your rate will only be locked in for a period of up too 30 years. Once the term expires, the coverage ends.Cash-Value Life Insurance – Includes Whole Life Insurance, Universal Life, Indexed Universal Life and Variable Life Insurance Policies. These policies are designed to provide permanent coverage with some long term cash values, but the policies are as diverse as the number of companies that offer them and are expensive.#4) The Dirty Little Secret – Now 90% of life insurance agents would entirely disagree with this statement, but then again they have been trained too. How do I know, because they trained me. The fact is that our goal is to help families address multiple needs within their budget and the fact is that only on rare occasions should families purchase cash-value life insurance. There is a need for permanent insurance in business planning, estate planning or even for final expenses for families without sufficient assets, however, for most families you should be wary of these products which are often sold as “retirement” supplements or “education” funding vehicles. The fact is that in 11 years I have never, not a single time, not once! Seen a cash value life insurance policy that has provided the cash values initially projected. Nearly every life insurance company has settled class-action lawsuits due to selling practices and unrealistic projections and despite these settlements most companies continue to practice these sales techniques. If you purchased a variable life insurance policy ten years ago (life insurance with mutual funds inside of it), then I guarantee that the internal expenses have increased while the performance has fallen far short of the 10% or 12% returns you were sold on (unrealistic from the start considering the lifetime performance of the S&P is around 6%). If you purchased a whole life insurance policy then I guarantee that the dividend has decreased over the years and the company has also lowered the interest rate on dividends. These are indisputable facts.The reality is that with proper planning, a long-term term insurance policy can provide an extremely low premium and subsequently allow you to save for your other financial needs. With proper planning you may some day lose your term insurance coverage but would have saved more than enough money to meet any survivorship needs.So why do agents sell you cash value life insurance? Simple…Commissions. For instance, an agent might push you to purchase a 100,000 Variable life policy with a $150 monthly premium. They will illustrate a high return and utilize loans to show a huge income at retirement. However, what they can’t show you is an example of a “real” client that had purchased one of these policies and been provided with that substantial income. The agent will earn a commission on this sale depending on your age of $1,000 - $2,500, plus a renewal commission of 5%-8% annually and “trail” every year. Now if that same agent sold you a $150 annual premium term insurance policy and had you save the difference in a low-expense mutual fund, their commission will drop to $100-$250 and they will earn a commission of 1%-5% on your ongoing fund contributions. Now you see the difference.

#4) Not All Companies Are Created Equally. The reality is that life insurance rates can be drastically different from company to company merely because those companies are targeting different market segments or different product focus. The company that offers the best rate to superman is typically not the same company that will offer the best rate to Homer Simpson.

#5) So you have health problem, you smoke, your overweight? No problem. There are two types of companies that exist, those who underwrite based upon stringent guidelines and health statistics, and those who underwrite the individual. Those companies that will examine every detail of your life and those that won’t even require a medical exam. There are always options for obtaining insurance, your premiums may be higher based upon certain health conditions, or your coverage may be limited, but there are always options.

#6) Products Change and so do rates. There are numerous actuarial and marketing factors that go into the pricing of life insurance products. You may have purchased a product 3 years ago and because of competition or other factors you may be able to lower your premium by shopping around today. Additionally, you may have purchased a 30 year product ten years ago and might find that a 20 year product today could lower your premiums. Competition, Claims Experience, and actuarial changes occur over time and just because you own one product today does not mean that another product might offer lower premiums 3 years from now.

#7) Don’t assume group term insurance is in your best interest. If you work for a government body or larger company you may have been offered the opportunity to purchase additional life insurance, without an exam. Although at younger ages or for those with medical conditions this premium may be low, most of these plans have an increasing premium over time and are designed to create a situation in which your premiums become so expensive that you eventually cancel coverage. In addition, changes in employment, health or federal tax laws (in regards to your employer) may create a situation in which you want coverage but it may no longer be available.

#8) You may as well use an agent, you’re paying for it no matter what. When it comes to purchasing any type of insurance product then you should know that purchasing through a 1-800 number or online is providing you no benefit. Yes, you are not dealing with an individual insurance agent or financial advisor, but you are still paying for it. Insurance companies cannot legally discount or offer lower rates to those who purchase any type of insurance directly; as a result you are paying for service that you deserve and will never receive. So give us a call or give an independent agent or advisor a call and make sure they are not captive to a single company.

#9) No one is invincible. There is one unfortunate side effect of growing up, we all come to know the reality that life is chaotic and that none of us are immune. For most of us, our family comes first, and now is the time that we all take steps to make sure that if tragedy were to strike our family, they are at least financially protected.


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HCM Financial

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