Life Insurance Is Important Part Of Financial Planning Process
Life insurance is probably the most overlooked or lacking aspect of peoples estate planning. Many clients claim that financial security for their spouse and/or children is a priority, yet when the subject of life insurance comes up, they often look with a blank stare. FIM Group is a fee-only advisory firm, which means we sell no products (life insurance or otherwise) and are not compensated via commissions. As Certified Financial Planners (CFP), our job is to explain the financial planning process and inform clients of the holes in their planning. And after informing them of their needs, provide the name(s) of low-cost, low- load companies that sell the product most appropriate for a clients needs. Like it or not, life insurance is a necessary evil for those building wealth, those with very large estates who want liquidity to pay estate taxes if needed, those with debt, and those with one wage-earner in the family (i.e., one spouse works, the other stays home to raise children).
Having said that, what follows are ten tips* about the various kinds of life insurance products currently offered on the market and some nuances of each:
1. Life insurance policies fall into one of two camps.
There are term policies, or pure insurance coverage. Then there are the many variants of whole life policies, which combine an investment product with pure term insurance and build cash value.
2. Insurance is sold, not bought.
Agents sell the vast majority of life policies written in the U.S., because the life insurance industry has a vested interest in pushing high-commission (and high-profit) whole life policies.
3. Whole life policies are expensive.
Policies with an investment component cost many times more than term policies. As a result, many people who buy whole life often cant afford an adequate face value, leaving themselves underinsured.
4. Whole life policies are built on assumptions.
The returns quoted by the agent are simply guesses not reality. And some companiese keep these guesses of future returns on the high side to attract more buyers.
5. Keep your investing and insurance strictly separate.
There are better places to invest and without the high commissions of whole life policies.
6. Buy enough term coverage to fill your needs (discuss with a fee-only adviser).
Life insurance is no place to skimp, especially with rates at historic lows.
7. Match the term of the policy to your needs.
You want the policy to last as long as it takes for your dependents to leave the nest or for your retirement income to kick in.
8. Buy when youre healthy.
Older people and those not in the best of health pay steeply higher rates for life insurance so buy as early as you can, but dont buy until you have dependents.
9. Tell the truth.
Theres no sense in shading the facts on your application to get a lower rate. Be assured that if a large claim is made, the insurance company will investigate before paying.
10. Use the web to shop.
Buying life insurance has never been easier, thanks to the Internet. You can get tons of quotes and avoid pushy salespeople.
The important thing to take from these tips is this: before you shop around and before you buy a product that may be inappropriate or inadequate, talk with one of our certified financial planners to determine what makes sense given your personal situation. Just because your neighbors brothers sister purchased a whole or universal life policy from her agent doesnt mean thats the way to go for you. Everyones situation is unique, and the best way to determine this is to come in for a review. Its possible we may find youre paying too much for a policy no longer needed and/or are underinsured. Doing something now will provide the financial security you want for your loved ones.
by: Paul Sutherland