The Seven Don’ts of Buying Life Insurance

LifeInsurance2Believe it or not, buying life insurance can be a most satisfying experience. Like anything else, you just need to know what you’re doing. A lot of it comes down to avoiding the pitfalls that give many people frustration and aggravation.

Here are the Seven Don’ts of Buying Life Insurance that I have identified in my 25 years of working with consumers. Steer clear of them, and I guarantee you will be quite happy with your purchase.

1. Don’t kid yourself about the risks involved.

Sure, you are healthy. Sure, you take care yourself. Sure, you are a very safe climber or diver. Sure, the problems with alcohol/drugs/finances/the law are all behind you.

But here’s the thing: in the final analysis, nobody really knows when his final day on this earth will come. It could come at any time, and in any way. There are a multitude of threats beyond our control: undetected medical conditions, such as aneurysms. Drunk drivers. Freak accidents. Household fires. Car crashes. Street violence. Terrorism.

You and I can certainly take care of ourselves and live a good life, to tilt the odds in our favor. These efforts can help keep the cost of our life insurance down. But don’t think that a lower premium guarantees longer life longevity. If you are indeed committed to securing the financial future of those who have become financially dependent on you – your family, your business, and your favorite charities – then you have to admit that their future without you could very well start tomorrow.

So buy the life insurance now.

2. Don’t treat insurance like an investment – or a form of gambling.

People tend to lump all financial products together. Insurance, annuities, investments, etc., seem all too similar. This is especially true when life insurance products build cash value and provide a benefit while the insured is still alive.

But life insurance is not an investment. Investments are for you while you are alive. The longer you live, the more value that investment can attain. Life insurance is for your financial dependents when you die. The sooner you die, the more bang for your premium buck these beneficiaries receive.

It makes no sense to say, “Well, I can take the same premium amount and invest it. With good returns I should be able to self-insure at some point in the near future.” That may be very nice for you, but it will do your beneficiaries absolutely no good if you die sooner than you hope. Besides which, what if you get hurt, or sick, or lose your job, or the market crashes? Your plan to self-insure may fall short, and so your dependents may end up with absolutely no security at all. That is called gambling with their financial future, not insuring it.

3. Don’t compare your quotes to somebody else’s.

Life insurance is probably the most comprehensively underwritten product in the financial marketplace. Many diverse factors are assessed for their impact on your mortality: age. Gender. Current health. Medical history. Family medical history. Lifestyle. Hobbies. Job. Smoking. Alcohol and drug use. Financial record. Criminal record. Driving record. Foreign travel.

Insurance actuaries have compiled a gigantic amount of mortality statistics to help them set reasonable rates. Trends emerge that prove to be consistently true: women typically live longer than men, so they pay less. Smokers typically die sooner than non-smokers, so they pay more. You can have two people of the same gender, same exact date of birth, and same everything else, but if one has high blood pressure, and the other one doesn’t, then their rates for life insurance could be different. It goes without saying that if the face amounts and guarantee periods of their policies are different, the rates will be different as well.

Also remember that you may not know every factor that contributed to somebody else’s premium. People disclose personal information when they apply for a policy. Many times, their spouse, children, and business partner don’t know the whole story. This information is kept confidential by the professionals involved, of course. But friends and family are often not in a position to really know how somebody else qualified for the rates they were given.

One other point: let’s suppose that you have been assessed an extra premium because of a higher risk. Maybe it’s a medical condition, or an adventurous hobby. Is it worthwhile knowing what the rate would be for somebody who didn’t have that extra risk? Could be – but only if that gives you something to shoot for by improving your health, or dropping the hobby. For now, you have to bite the bullet and pay extra until you qualify for something lower.

4. Don’t let your doctor play insurance man.

Doctors are supposed to be in the business of healing, of diagnosing and treating medical conditions. A good doctor upholds the ethic of “do no harm,” and tries his or her best to abide by that. If a mistake is unfortunately made, or things just turn for the worse, they should do their darndest to help the patient recover.

Either way, they get paid. That is the stark truth. Hopefully, you as the patient live a long, healthy life; but if tragically you do not, the doctor bills your family anyway – and expects prompt payment.

The life insurance underwriter, on the other hand, often makes a much more critical assessment of your mortality and possible life longevity. The reason is very simple: he has to put his money where his mouth is. He has one shot – the time of your application – to determine what risk you represent to his company. Based on his assessment, his company will be liable for hundreds of thousands or millions of dollars to your beneficiary. And that amount would have to be paid even after only one monthly premium was submitted, if tragically that is when a claim is filed. Quite a deal.

Frankly, I have found many times when the mortality assessment of an underwriter has more credibility than the doctor’s prognosis. It is simply the business of the underwriter to be an expert in this matter. They don’t pretend to be doctors and don’t give medical advice. Physicians should show the same professional courtesy. They shouldn’t pretend to be underwriters, and so shouldn’t venture their opinion on whether or not their patients could qualify for coverage.

5. Don’t second-guess your advisor.

You hire professionals to do things you don’t know how to do. They are experts in their field. You are not an expert in their field. That is why you hire accountants to do your taxes; lawyers to defend you in court; and doctors to treat your illnesses.

Life insurance brokers are hired to get you the best value for your premium dollar. Our job is to get to the lowest cost, the most benefit, or the longest guarantee. You don’t pay us out of your pocket, but your premium includes our compensation.

Let us do our job. We make an upfront investment in you as our client. We don’t get paid until you are satisfied. We have a huge incentive to make sure you are happy now, and stay happy throughout the duration of your coverage. We don’t want to give you restless nights, worrying that you have the wrong policy. If you have selected the right professional – an independent, life insurance specialist, who prequalifies you before you submit a formal application – then you are in good hands.

6. Don’t expect the perfect product.

A life insurance policy is comprised of three main factors: face amount, premium, and guarantee period. In an ideal world, we would all buy all the coverage we would ever need, for as long as we would ever need it, and at a guaranteed rate. It would make sense to keep it in force for our entire life, so we can be sure a claim will be filed and the benefit paid.

Many times, though, we cannot do that. There are often budgetary constraints. And, we don’t always know how much insurance we will need in the long term. So what do we do? As with any case like this – facing multiple considerations – we set priorities.

There is no doubt that the number one priority is face amount. Make sure you have enough coverage in force today. This is simply because, as we said above, you simply do not know when a claim will have to be paid. Too often, people try to get a “good deal,” and skimp on the face amount in favor of a long-term guarantee. But if their family or business tragically loses them sooner rather than later, the beneficiary will have been short-changed. They would rather have the extra benefit than the longer guarantee. That’s why I tell clients that if your budget is forcing you to choose between $2 million of 10-year term insurance, and $1 million of 20-year term, for example, you take the product with a higher face amount and the shorter guarantee period.

It is smart business sense to have a budget for any purchase. With such a constraint, it is often hard to get maximum coverage with the longest guarantee period. If you find yourself with this dilemma, then first look to alternative premium funding sources. You might be able to leverage, liquidate, reallocate, refinance, or use any of a number of other techniques to free up funds. If this is not possible, then shorten the guarantee period. Revise your financial planning to secure funds in the near future for additional coverage. There is nothing wrong with buying life insurance in stages – as long as you make sure you remain eligible for coverage.

7. Don’t put the investment cart before the insurance horse.

How do people get rich? We work hard. Earn. Borrow. Invest. Leverage. Provide greater value to bigger payers.

How do we stay rich? Insurance. Insurance prevents catastrophes from wiping out your riches. You could have a huge amount of savings and investments, but any number of man-made or natural disasters could clean them out. Even if you could afford to sustain the loss, why pay dollar for dollar to do so? Every dollar of life insurance benefit costs pennies. It’s much smarter to let an insurance company take on the risk.

So, it makes sense to have a strong insurance portfolio in place to serve as the foundation of your financial portfolio. Now the question is this: there are many types of insurance policies. Which is the most important?

That’s an easy question. Do you know why? Because the type of insurance that is the top priority should be the one that protects you against the most likely risk. And that is life insurance. You can buy medical insurance, but you may never get hurt or sick. You can buy disability insurance, but you may never lose your ability to work. You can buy professional liability insurance, but you may never get sued. You can buy business liability insurance, but you may never sustain workplace damage. You can buy auto insurance, but you may never have an accident. And on and on. But you know with 100% certainty that you will die, and that therefore a claim will be filed on your life insurance policy. As long as you keep it in force. This is why you need to buy insurance before you invest your money, and why buying life insurance is a top priority.

Please feel free to comment, or to contact me directly with a specific question. If you need a quote now, or a second opinion on a quote you have received, the best thing to do is to call me toll-free at (866) 633-1818. Or email me at skobrin@stevenkobrin.com. I also encourage you to download my free Life Insurance Guide – see the above tab. Many people have found it to be extremely educational.

 

Want to learn more?
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