Here are two reasons you need life insurance and three tips for buying the right type of life insurance. There’s no need to be confused about riders, captive agents, or the difference between temporary and permanent life insurance! These tips for buying life insurance are from finance professional Ryan Pinney, of TheProAdvisor.com.
“Life insurance is one of the most commonly misunderstood and under-used financial products available,” says Pinney. “Most people don’t understand how, when, or why to use life insurance or the two main benefits it offers.”
For more in-depth information, read Questions and Answers on Life Insurance: The Life Insurance Toolbook by Anthony Steuer. And, here are Pinney’s tips for buying life insurance…
Why do you need life insurance?
1. Life insurance is designed to protect against economic loss, specifically the economic value of a human life. This life or “capital” can be defined as the future earnings, current debt obligations, or intellectual value of a person. In essence, life insurance is a hedge for human capital.
2. Life insurance provides a tax free death benefit that replaces the capital value of the insured at death. Obviously it doesn’t replace the person, but it does ensure that an economic loss isn’t added to the physical and emotional losses already suffered.
Whether you’re a newlywed, empty nester, or retiree — nearly everyone needs life insurance! Read Tips for Maximizing Your Retirement Income for more info on retiring. And, tTo determine your life insurance needs, ask two specific questions:
- How much insurance do you need?
- How long do you need it?
Answering these questions will also determine your balance between temporary and permanent life insurance.
There are two primary methods that can be used to determine how much life insurance you need. The first is the Income approach and the second is a Needs or Expense approach. Neither is perfect, but the offer good estimates.
The Income approach uses your current income and an assumed inflation rate to determine how much insurance you need to protect the insured’s income level over a specific time period. The Needs approach uses your current expenses and an assumed inflation rate to determine a minimum income level needed to meet or satisfy those needs over a specific period of time.
3 Tips for Buying Life Insurance
1. Remember: not all life insurance agents are created equal. Some agents, called “captive” agents, are required to sell only one company’s products. Although many of these agents are honorable, ethical, and educated in their field, they tend to see everything as it relates to their products, not necessarily your needs for life insurance.
2. There are two basic types of life insurance: temporary and permanent. Temporary insurance is also known as term insurance. It is important to know what kind of insurance you need and how much you need of each type. Most people need a lot of term and a small amount of permanent insurance; these needs tend to shift over time.
3. The amount of life insurance you need changes. Losing a job, getting a pay raise, marriage, divorce, births, and deaths all affect the amount and types of insurance you need. It is important to get regular reviews to ensure that you aren’t over or under insured.
All insurance products have different features, called riders, which provide different benefits in addition to the death benefit. Some common riders are disability income, waiver of premium, return of premium, and accelerated death benefits. The riders can be free or add to the overall cost of the insurance and may not be needed by everyone, but they should at least be presented and considered during your selection process.
When buying life insurance, make sure you’re dealing with a true “Financial Professional” and not just a salesperson. Check the license status and complaints history of your advisor on your state department of insurance website. Ask what professional designations they hold, what specialized training they’ve received, and what professional organizations they belong to. For extra help, read Tips for Choosing a Financial Planner.
Do you have any questions or thoughts on these tips for buying life insurance? Please comment below…
Ryan Pinney writes for the financial literacy and education website TheProAdvisor.com.