ARA) - If you’ve recently gotten married, started a family or had some other major financial event occur, the last thing on your mind should probably be the first. Now is the time to start shopping for a life insurance policy.
“Many people put off buying life insurance because they don’t think they’ll need it, or because it’s too complicated. Yet, waiting can be a financially devastating mistake,” says Dick Hall, senior vice president of life insurance for Northwestern Mutual. “Often people wish they would have bought more life insurance while they were younger and healthier, which is oftentimes the best time to buy.”
Before purchasing a policy, Hall recommends doing some homework. A good place to start is with an understanding of some basic myths about life insurance.
* Myth #1: “Buy term and invest the rest”
This advice is offered by “experts” who have good intentions of helping consumers initially save money. They recommend buying term insurance and investing the difference between the cost of permanent insurance and the [initially] lower premiums for the term policy purchased. This advice goes against basic human nature -- few people are disciplined enough to follow through on investing any of the difference on a regular basis. It also ignores individual financial needs over the long term.
Term policies typically last a specified number of years, such as 10, 20 or 30 years, or to a specific age. While term insurance may cost less initially, it can be more expensive for those with longer term needs. There is also the chance, during the “term” of the policy, that the insured could develop a medical condition which would make renewal or purchase of another policy in the future cost-prohibitive or impossible.
“Term insurance is a good temporary solution,” says Hall. “On the other hand, permanent insurance is for the person who wants some guarantee that their premiums will never go up, their death benefit won’t disappear and the cash value in the policy will grow year after year. Owning the right amount of insurance is more critical than which kind.”
* Myth #2: “Buy life insurance equal to five times your salary.”
Just like the term vs. permanent debate, there are many rules of thumb out there -- ranging from five to 25 times your income -- that attempt to simplify the decision of how much life insurance to buy. Ultimately, these one-size-fits-all recommendations cause more confusion and can leave you without the right amount of insurance coverage.
The reality is that many Americans are underinsured and most probably don’t even know it. A calculator can’t address your unique situation or make sure the people who depend on you will be financially secure if you die too soon. A $250,000 life insurance policy, for example, may be just right for a person with working spouse and one older child. Another family with only one parent working outside of the home and three younger children would probably have very different life insurance needs.
Age, lifestyle, debts, assets, taxes, number of children, income, amount and terms of existing insurance and other special considerations, such as a family-owned business or a child with special needs are just a few of the things that must be considered.
“The truth is, there is no cookie-cutter solution for buying life insurance,” says Hall. “There are many things to consider in determining the right amount for a given set of circumstances. Everyone’s situation is different and you can only arrive at an appropriate amount if you take into account the needs, finances and goals unique to each individual. For example, is there a mortgage payment or other debt? Will childcare costs be an issue if a parent passes? Does the insurance need to help pay for a child’s education?”
Having the right amount of life insurance can make the difference between financial security and financial hardship for the ones you leave behind. Be vigilant in deciding how much to own and consider meeting with a financial professional with this important decision.
* Myth #3: “Buy from fee-based planners. Purchase no-load policies.”
Some feel buying life insurance from fee-based planners, rather than from commissioned life insurance agents, is a better route. In theory, consumers avoid paying commissions. This is the same idea behind buying a no-load policy.
“Commissions are just one part of the overall cost of life insurance,” notes Hall. “Keep in mind that fees and other ongoing costs are still paid when working with a planner. These additional out of pocket expenses need to be considered. Also important to consider is the reality that some people may avoid meeting with a fee-based planner on an annual basis to be sure their plan is in alignment with their goals. In an effort to save money on planner fees, some clients will unknowingly jeopardize their long-term goals by not updating their plan on a regular basis. This is a critical step to take year after year, especially if your goals or priorities change over time, which they usually do.”
Moreover, many companies, such as Northwestern Mutual, offer their policies exclusively through their financial representatives, so products with the best value may not be available to brokers or planners. Hall says the bottom line is that consumers shouldn’t buy a policy just because it’s a no-load policy, and should look at the performance of a policy and the “value added” benefits of working directly with a financial representative.
* Myth #4: “Permanent life insurance is too expensive”
While permanent insurance is more expensive initially than term insurance, those looking to buy life insurance should consider their long-term needs. There are issues of:
-- How much insurance you need and how long you’ll need it.
-- What you can afford.
-- What types or combination of types are best for your needs.
-- How your insurance needs might change over time.
-- Which company you should buy from.
If coverage is needed long enough, eventually term premiums will be more expensive than if a permanent policy had been purchased originally -- permanent or “whole life” insurance has level premiums that do not go up. As an added benefit, cash value accumulates within the policy on a tax-deferred basis and can be borrowed.
* Myth #5: “Don’t buy insurance on kids”
Another common misunderstanding is that parents shouldn’t buy life insurance on their children because they have no income to protect. In addition to the insurance benefit, people usually buy life insurance on children for several reasons:
-- To protect their children’s future insurability (should they become ill later).
-- To “lock-in” at very low premiums, and
-- To build a financial resource that will be available if needed -- when the children are older -- to help pay for education, a new home or other major purchase.
Since rates are much lower for children, when they begin to pay the premiums themselves, they'll find the cost of keeping the insurance in force affordable. It’s also important to keep in mind that life insurance can play a role alongside other savings and investment vehicles.
Not all insurance or insurance companies are equal. Hall says before making any decisions about life insurance, it’s important to meet with a good financial professional from a highly rated company who can help you understand your needs and identify the best solution for your particular situation. To learn more, or to locate a Northwestern Mutual Financial Network representative in your area, visit the Northwestern Mutual Web site at www.nmfn.com. The Northwestern Mutual Life Insurance Company is located in Milwaukee, WI.
Courtesy of ARA Content
