Should You Buy Or Be Sold Life Insurance?


MagicAll my life I have had people telling me what to do.  As a child, my parents told me what to do.  As I grew up my teachers and church told me what to do.  Now that I am married my wife tells me what to do.

As you probably guessed, I am very sensitive towards any form of manipulation.  This morning I read, “Life insurance is sold, not bought, but for how long?”  For the past 25 years I have rebelled at the thought that Life insurance must be sold to people because it is too complicated for them to understand.

In the past few years, the pendulum has started to swing back to the other extreme.  The politicians and press have convinced people that insurance is a commodity to be purchased with ease over the internet.

I believe that the truth is somewhere in between the two extremes.  Most Americans are intelligent and perfectly capable of making an informed decision. It is my contention that many families would be better off if incompetent insurance agents would shut their mouth and do their primary job of helping people with their applications.  Let them decide what type of insurance they need.

Unfortunately, when insurance agents do keep their mouths shut, many people spend money just to say they have Life insurance.  They do not bother to take the time to determine if the Life insurance they buy is appropriate.

EXAMPLE

By way of example, the most simple form of Life insurance is Term insurance.  It is the least expensive form of insurance and easiest to get.  Term Life insurance is ideal for replacing an income and paying off bills if a wage earner dies while children are still in the house.

There is a problem, however, with Term Life insurance.  The least expensive form of Term is called Annual Renewable Term.  The premiums for it are the lowest possible but will increase every year.  By the time someone is in their 70s the cost for Term insurance is astronomical.

Very few insurance companies sell Annual Renewable Term anymore.  Most Term policies will lock-in a premium for multiple years.  The longer your premium is locked-in, the more you will pay.  The result is that a 30-year Term Life insurance policy is much more expensive than a 5-year Term Life insurance policy would be.

The most common Term Life insurance policy sold is a 10-year Term.  That means that the premium will not increase for 10 years.  In the 11th year the premium goes up significantly.  I have seen the premium increase as much as 6 times.

If the insured is smart and insurable, this is not normally a huge problem.  All he has to do is submit a new application and go through the underwriting process again.  He will be given a new policy with a much smaller increase in premium.

THE POTENTIAL PROBLEM

The problem is that if the insured is uninsurable his options are limited.  He can pay significantly more to keep all of his Life insurance.  If he wants to keep his premiums where they have been for the last 10 years, he can see if his insurance company will allow him to keep only a portion of his Life insurance.  (Not all insurance companies will.  It depends on the type of plan you have.)

If the purpose of his Life insurance was to replace his income if he dies while the children are at home this strategy will not work.  If he gets a 10 year term when the oldest child is only 2, the premium guarantee will expire when the child is only 12.  If he were to suffer a disease during that 10 years that would make him uninsurable,  he is forced to pay more for Life insurance than he wants or lower his death benefit so that his entire income is not replaced when he dies.

A PROPOSED SOLUTION

The solution to this problem is for him to buy the appropriate Term Life insurance when he buys it originally.  Most insurance companies offer a 20-year Term Life insurance plan as well as a 10-year Term.

If your children are already teenagers, the 10-year Term will probably be just fine.  However, if the children you are looking to provide for are still pre-schoolers, you really should consider buying a 20-year term.  It may be more expensive but if you become uninsurable during the first 10 years, you do not have to make the “tough decision.”

As I read the article above, I remembered that the primary job of the insurance agent is to coordinate the underwriting process.  Your insurance agent is the  local “face” of your insurance company.   However, he should only be a source of information.

If you know, in general, what you want before you call an insurance agent, you will be able to use him in the manner that I believe an insurance agent should be used.  He should be a source of specific information only.  The rest of his job should be regulated to the background.

In an ideal world, after your Life insurance policy has been issued and you approve it, your relationship with your insurance agent will change from a business relationship to a friendship.  He should monitor your Life insurance portfolio and let you know if there are any changes.  Other than that, the only time your relationship should change back to a business relationship is when you have questions or concerns.

In a perfect world, consumers would take personal responsibility for their Life insurance portfolios.  They would take the time to determine which of several different options will meet their needs before they commit to an insurance company.

Unfortunately, we do not live in a perfect world.  Our politicians and press have convinced us that one type of insurance is as good as another.  We just have to buy the least expensive option and we will be okay.

As  long as people continue to ignore the details of their Life insurance policies, people are going to make costly mistakes.  Life insurance will be “Sold” by incompetent insurance agents and not “Bought” by informed consumers.

To make certain this does not happen to you, take the time to decide what you want before you even call an insurance agent.  If that agent is not able to help you get what you want but has a “better idea,”  find an agent who will help you.

The “better idea” may be legitimate.  It may be something that you should consider.  However, remember, that you are paying the premium.  Your Life insurance plan should meet your needs and not the commission needs of your insurance agent.

Tim Barnes, CLU does not just hold an insurance agent’s license.  He is also a licensed Life & Health Insurance Counselor with over 25 years experience.  You can learn more about the author in the ABOUT page of this blog.

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