The Seven Don’ts of Buying Life Insurance
Believe it or not, buying life insurance can be a 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.
Over the course of my 25 years of experience, I have discovered seven don’ts of buying life insurance. By steering clear of these, I believe you can experience more satisfaction with your purchase.
1. Don’t kid yourself about the risks involved.
Yes, you may be healthy today and take the utmost caution in life. But the fact of the matter is, no one knows when his final day on earth will come. There are a multitude of threats beyond our control, such as undetected medical conditions, freak accidents, household fires, car crashes, and even terrorism.
While we can all improve our health to our best efforts, which can keep the cost of our life insurance down, don’t assume that a lower premium and higher level of health guarantees life longevity. If you are committed to securing the financial future of your loved ones, be it family or charity, then you have to admit that their future without you could very well start tomorrow. All the more reason to buy the life insurance today.
2. Don’t treat insurance like an investment – or a form of gambling.
People tend to lump all financial products together. Insurance, annuities, and investments may seem similar — especially when life insurance products build cash value and provide a benefit while the insured is still alive — but they aren’t.
Life insurance is not an investment. Investments are for you when 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 doesn’t make 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 benefit you, but it won’t help your beneficiaries should you die sooner than you hoped. Furthermore, what would happen if you fell ill, lost your job, or the market crashed? Your plan to self-insure may fall short and your dependents may end up without any security. This is called gambling with their financial future, not insuring it.
3. Don’t compare your insurance quotes to someone else’s.
Life insurance is likely 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, drug use (current and past), financial history, criminal and driving record, foreign travel…you name it.
Insurance actuaries have compiled a nearly endless number 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 may 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.
Additionally, you may not be aware of every factor that contributed to someone 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. Friends and family are typically not in a position to really know how somebody else qualified for the rates they were given.
And finally, let’s suppose that you have been assessed an extra premium because of a higher risk, be it 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, diagnosing, and treating medical conditions. A good doctor upholds the ethic of “do no harm,” and tries his best to abide by that. If a mistake is unfortunately made, or things just turn for the worse, he does his best to help the patient recover.
Either way, the doctor gets paid. That is the stark truth. Hopefully, the patient live a long, healthy life; but if tragically they do not, the doctor still bills the family and expects 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 could be liable for millions of dollars to your beneficiary, and that amount would have to be paid even after just one monthly premium was submitted.
Frankly, I have found many times that 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 they don’t give medical advice. Physicians should show the same professional courtesy. They shouldn’t pretend to be underwriters, and so they 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 the things you don’t know how to do. They are experts 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 you the lowest cost, the biggest 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 provoke 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 buy all the coverage we would ever need for as long as we would ever need it 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, we must 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 your family or business tragically loses you sooner than expected, your beneficiary will be 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, 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? Work hard, earn, borrow, invest, leverage, and provide greater value to bigger payers. How do they 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 manmade or natural disasters could clean them out. Even if you can afford to sustain the loss, why pay dollar for dollar to do so? Every dollar of life insurance benefit costs pennies. It’s smarter to let an insurance company take on the risk.
It makes sense to have a strong insurance portfolio in place to serve as the foundation of your financial portfolio, but which type of insurance policy is most important? It’s simple: the most important type of insurance is the one that protects you against the most likely risk: 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 auto insurance, but you may never have an accident. But you know with 100% certainty that you will die one day and that a claim will be filed on your life insurance policy. For this main reason, life insurance should be a top priority.