Archives For Insurance

How to Buy Life Insurance

Corey —  October 28, 2009

If you’ve realized you need to buy life insurance and you’ve figured out what type of insurance you need and how much, your next step is to actually buy the insurance you need. With a few simple steps, you can make sure you buy the right policy for you without spending too much.

Gather Your Information

The first thing you should do before buying any kind of insurance is to make sure you really need it. Buying insurance you don’t actually need is a waste of money and should be avoided at all costs. When considering your need for life insurance, you need to ask yourself what will happen if you or your spouse dies. Would the survivor (you, your spouse, or your children) be able to manage without any insurance proceeds? If so, you don’t need insurance on that person.

If not, you need to ask yourself how much coverage you actually need. We’ve already looked at the issue of how much life insurance you need in a previous article. Make sure you’ve carefully determined this amount as it will be one of the main factors determining the cost of your insurance.

If you really do need life insurance and you’ve figured out how much coverage you’ll need, then you’ll need to decide if you need permanent life insurance or term life insurance. Most people will only need term life insurance. There are only a few reasons you might need permanent life insurance.

If a term policy is right for your situation, you need to choose a term length (10 years, 20 years, 30 years, etc.). How long you’ll need the coverage depends on the reason you’re buying the insurance. If it’s for income replacement, you’ll need the coverage until you would retire. If it’s to cover certain debts, you’ll only need coverage until those debts are paid off. The term length you choose will have a significant impact on the price of your insurance policy. But don’t try to save by choosing a shorter term than you really need.

While you’re shopping for insurance coverage, you’ll need some basic information about your health and financial situation. Have that information handy, and be prepared to undergo a medical examination before the insurance company will actually issue your policy.

Keep It Simple

When you go to purchase a life insurance policy, you’ll be bombarded with a variety of options (usually called “riders”) that you can add on to the basic policy. Your best bet is to stay away from these options. Generally, they are a bad deal for you but a great profit center for the insurance company.

For example, with a term policy you’re likely to be offered a “Return of Premium Rider”, which promises to return all the premiums you’ve paid into the policy if you keep it until the policy terminates (at the end of the term you’ve selected). However, you’re going to pay a higher premium for this “privilege”. If you were to instead invest that amount (the cost of this option), you’d end up better off in the long run even with a conservative investment portfolio.

The same goes for a “Waiver of Premium Rider”, which promises to cover the cost of your insurance if you should become disabled. You should not mix life insurance coverage with disability insurance coverage. Also, avoid the “Accidental Death Rider”, which usually doubles the amount of your life insurance proceeds if you die because of an accident. When you calculate your life insurance needs it doesn’t really matter how you die, you’re insuring the financial needs of your survivors because you died. How you died is not going to make a difference in calculating that need.

If you’re going for term insurance, you’re better off going with a basic, level premium term policy with no frills for a term length and coverage amount that will meet your needs. You’ll cover your other needs (like disability) with other insurance coverage specifically designed for that need.

Shopping for a Policy

You’ve figured out how much coverage you need, how long you’ll need it, and what kind of insurance policy you need (term or permanent). Armed with that information, you’re ready to start shopping around for insurance. You have a couple options here:

In Person or Over the Phone – You can shop for life insurance in person by going to or calling a life insurance agent or broker. The key issue here is the difference between an agent and a broker. An agent represents the life insurance company, and he is only bound by law to serve the best interests of the insurance company (not you). An agent may be a “captive” agent, which means they only work for one insurance company, or they may be an “independent” agent, which means they work for more than one insurance company. Either way, they are working directly for the insurance company as the company’s representative and they have no legal duty to serve your best interest. Agents can only get quotes from the insurance companies they work for, which means you might not get the most competitive rates.

On the other hand, a broker represents you and is bound by law to keep your best interests in mind at all times. Insurance brokers are working directly for you and do not work for the insurance company. They may provide you with quotes from any number of insurance companies, which helps you find the best rates available. They are also required to clearly disclose their compensation for selling you a policy. It should be clear that I would strongly recommend working with a broker whenever possible. Ask your family, friends, or a trusted advisor (accountant, lawyer, or financial planner) for a recommendation of a good insurance broker. If you can’t get a recommendation, search for insurance brokers in your phone book or online and meet with several to find someone you trust. Generally, these brokers will be able to help you with other insurance policies as well (auto, homeowner’s, disability, etc.) so you’ll want to get someone you can enjoy working with and believe to be trustworthy.

Online – The Internet has made it very easy to get insurance quotes with little hassle or time. There are a wide variety of online insurance quote services available, which is obvious with a simple search. Insure.com is one of the best sites to get life insurance quotes as they ask you pertinent questions and outline the requirements you’ll need to meet to qualify for the policy quotes they provide. If you have a complicated situation or want to talk to someone in person, you can try Accuquote.com or call them at 1-800-442-9899.

Get Multiple Quotes

You may be tempted to get the first Cheap Term Life Insurance plan out there, but make sure to do your homework. Regardless of the method you choose, be sure to get multiple quotes. Also, keep in mind that if you’re married the best deal might involve using separate insurance companies for you and your spouse. These warnings are especially important if you choose to use a life insurance agent because they will be limited in how many companies they can get quotes from. This is an important decision, so make sure you give it the time and consideration it deserves.

Questions?

If you have any questions, feel free to leave them in the comments. I always do my best to answer readers as soon as possible. Thanks!

Show Me in the Scriptures…

Corey —  October 27, 2009

       A reader recently left a comment on my post discussing how much you should have in your emergency fund. Frank said:

Could you please show me in Scripture where it says believers are to have an emergency fund?

Thank you.

       I responded to Frank’s question in the comments, but I think this is an important enough issue to address in its own post.

       Not all personal finance advice can be backed up with a specific quote from Scripture. Does that mean it is bad or unchristian? Not in the least. If the advice follows the pattern of teaching and wisdom in the Bible, it can still be considered good advice for Christians despite the lack of a specific Biblical reference.

       For example, is there a specific Bible verse telling you that you should create a will? No. But it’s still a wise thing to do. Is there a specific Bible verse that tells us to update our résumés? Again, the answer is no, but that doesn’t change the validity of the advice.

       This concept doesn’t apply just to personal finance. Is there a Bible verse telling us to buckle our seat belts? Nope. But does that mean you’re trusting your seat belt more than God if you buckle it? What about looking both ways before you cross the street? Do you lack faith because you do this?

       The problem with applying the “show me in the Scriptures” test is that there is not specific advice for every single situation we will encounter in life. There are guiding principles and values that, along with God’s Holy Spirit, will help us discern the wise choices. But you’re not going to find Bible verses telling you to brush your teeth, stop eating at McDonald’s, or to take advantage of an HSA if you’re eligible.

       Scripture does contain many verses teaching us the importance of wisdom in handling our affairs. Here are a couple examples:

       The simple believes everything, but the prudent gives thought to his steps.

Proverbs 14:15 (WEB)

       The plans of the diligent lead surely to abundance, but everyone who is hasty comes only to poverty.

Proverbs 21:5 (WEB)

       Precious treasure and oil are in a wise man’s dwelling, but a foolish man devours it.

Proverbs 21:20 (WEB)

       The prudent sees danger and hides himself, but the simple go on and suffer for it.

Proverbs 22:3 (WEB)

       In fact, the entire book of Proverbs points to the importance of wisdom and its place in the life of those who follow God. But what about all the times Jesus told us not to store up treasures on earth? Or when He taught us not to worry about what we’ll eat and drink and wear?

       Tell me, what did Christ mean when He said do not worry or be anxious? What does it mean to worry or be anxious? Those words mean to be distressed, uneasy, and tormented with care about something (material things in this case). Christ’s solution was for us to “seek first the Kingdom of God”. Instead of being worried about how we’ll meet our material needs, we should be worried about how we’ll meet our spiritual needs – how will we serve God and draw closer to Him.

       You can be worried and anxious about material things whether or not you wisely plan ahead. I can have an emergency fund and still be worried about material things. I can not have one and still be worried about material things. Even if I have an emergency fund, I can stop worrying either because I have that money saved or because I trust in God’s provision. That brings us to the other main teaching of Christ about money.

       When Jesus taught about storing up treasures and serving Money what did He mean? What does it mean to be wealthy or rich or to have treasure? All those words denote an abundance, which means having much more than what is sufficient or needed. Jesus’ warnings about wealth were not to tell us that we should never use money appropriately to meet our needs. Jesus warned us instead of the danger in accumulating more than what we really need. He told us not to become consumed with money and wealth.

       There is a vast difference between being consumed with accumulating an abundance of wealth and planning wisely to have enough to meet our needs. In the same way, there is a huge difference between being occupied with worry and prudently foreseeing needs and dangers and preparing to face those situations. These two teachings that Jesus gave us are so often stretched to mean that we should never save anything at all for the future because that demonstrates a lack of faith. The truth is that Jesus taught us to:

  1. Give God and His Ways priority in our thoughts and lives.
  2.        

  3. Avoid storing up more money than we will need. (That is, not to let becoming rich be our priority in life.)

       Proverbs commends wisdom and many New Testament verses speak to the importance of providing for your own family. We are not taught to make ourselves a burden to others when it is within our power to care for ourselves. Instead, we are taught that if there are any among us who cannot provide for themselves it is our responsibility as fellow Christians to care and provide for those people. Jesus’ teachings combined with the rest of Scripture in no way preclude us from saving for the future, using insurance, or utilizing money in any other wise manner. What is forbidden is making Money our god – giving priority to accumulating more money than we really need instead of serving God.

       The real issue then becomes finding contentment in Christ and determining our true needs. The danger we face is allowing the world to dictate our needs and success (a bigger house, a fancy car, expensive clothes, etc.) instead of learning to live on enough (our daily bread). That is the bigger issue here and the battle all of us Christians face. Once we have submitted to God in our discontentment and covetousness, we will be able to make Money serve us and God’s Kingdom instead of allowing it to be our master. But these are all topics worthy of their own discussion (contentment, defining needs, and avoiding covetousness).

       Please share your thoughts on this topic in the comments. I’m looking forward to hearing from all of you!

       Life insurance is a no-brainer for families where both the husband and wife work outside of the home. But single-income families often neglect the value of all the work the stay-at-home spouse accomplishes every day. If the stay-at-home spouse passes away, how will the surviving spouse keep his or her job and accomplish all the things their spouse used to do? That’s why life insurance for a stay-at-home spouse can be a very important part of your financial plan.

How Much Insurance?

       To figure out how much insurance you need, you have to know how much income you need to replace. But what’s the value of the work a stay-at-home spouse does? This will largely depend on your personal situation. If you have children, the value of a stay-at-home spouse is going to be much higher than it would be for a family without children. Considering all the cooking, errands, child care, laundry, cleaning, and various other things a stay-at-home spouse can accomplish, you should consider the value of that spouse’s work as equivalent to a full-time job.

       Many life insurance companies will provide coverage for the stay-at-home spouse equal to the working spouse’s coverage up to $1,000,000. If you have children, it makes sense to purchase the same amount of insurance for both spouses. This way the surviving spouse could choose to stay at home and take care of the children and housework without having to worry about income. If you don’t have children, you may not need to purchase quite as much insurance for the stay-at-home spouse – but you’ll have to decide how much you would need if the stay-at-home spouse dies.

       I don’t agree with the calculations that say a stay-at-home spouse is worth $120,000 or more per year. As I mentioned before, the working spouse could choose to stay at home or work less after his spouse’s death. Yes, it would take adjusting to a new situation and learning new skills, but good luck finding a life insurance company that will give you a $2,400,000 policy on a stay-at-home mom or dad.

Don’t Forget Your Stay-at-Home Spouse in Your Insurance Planning

       When you’re determining how much insurance you need, don’t forget to consider insurance coverage for your stay-at-home spouse. There’s true value to all the work a stay-at-home spouse does every day, and trying to juggle a full-time job plus all the extra work your spouse did will amplify the stress of dealing with your spouse’s death. Don’t neglect the importance of life insurance coverage on your spouse even if they don’t get paid for all the work they do.

       If you’ve determined that you need life insurance, your next step is to figure out how much coverage you should buy. You don’t need a complicated calculator to figure this out. You only need to know how much income you’ll need to replace if you die and how many years until you’ll retire.

Replacement Income

       Life insurance’s primary function is income replacement in case you die prematurely. How much income you replace will be up to you. You can choose to replace your entire income. Or you could assume you personally spend about 20% of your income and just replace 80% of your income. Finally, you could choose just to cover essential expenses for your survivors (like shelter, food, clothing, utilities, etc.).

       If you have children, you’ll most likely want to plan on replacing your entire income. If you don’t have children, you’ll need to decide what purpose you want your life insurance to serve. Is it to fully replace the income you would have earned or just to cover the essentials? Once you’ve figured out how much income you want to replace, you just need to determine how much insurance coverage you’ll need.

How Much Life Insurance?

       Now you need to figure out how many years you’ll need to replace your income. Generally, you’ll use the number of years until you retire. (But you should adapt the calculation to your situation if necessary.) Then use this chart to find out what factor you should multiply your replacement income by:

Life Insurance Factors

       So if you need to replace an income of $40,000/year and you have 40 years until retirement, you’ll multiply $40,000 by 25 to get $1,000,000 of insurance coverage needed.

       Next, subtract any savings you have that could be used instead of insurance. (Don’t count retirement savings because your spouse will need that for retirement.) That will leave you with the total amount of insurance coverage you need to buy. If you’re married, just repeat this process for your spouse.

That’s It!

       That’s all you need to do to figure out how much life insurance you need. Just make sure you’re very careful about deciding how much income you’ll need to replace as that’s the biggest factor in this calculation.

       There are only three reasons you would need permanent life insurance coverage. If these situations do not apply to you, then you shouldn’t buy or keep a permanent life insurance policy.

Do These Situations Apply to You?

       You may need permanent life insurance if any of these situations applies to you:

  • You Have a Special Needs Child. – If you have a child with special needs who will still need income after your death and is unable to earn it themselves, you should consider permanent life insurance. You’ll want to set up the policy to pay out into a Special Needs Trust, and you should work with a qualified attorney with specific experience in this area.
  •        

  • Your Estate Will Be Illiquid and You Will Owe Estate Taxes. – If you will have an estate that exceeds the estate tax exemption amount and will not have enough liquid assets to cover those taxes, you should consider permanent life insurance to cover that need. You’ll want to work with an experienced estate attorney and accountant or financial planner to estimate how much you’ll owe in taxes and determine how much insurance you should buy.
  •        

  • You Own a Business with a Partner or Partners. – Permanent life insurance can be used to set up a buy-sell agreement between you and your partner(s). The life insurance will provide the cash needed to buy out a partner after his death. Again, you’ll want to work with an experienced attorney and accountant to value the partner’s share and set up the agreement.

       Those three situations are very specific and apply to only a small percentage of people. That’s why permanent life insurance is a bad idea for most people. If those situations don’t apply to you, then you should only be looking at term life insurance – if you need life insurance at all.

Consider the Source

       If you have a life insurance salesman pressuring you to buy a permanent life insurance policy, ask yourself why he’s recommending that product. If you don’t have a true need for permanent life insurance, there’s a good chance he stands to make a huge commission on the policy and that’s why he’s making the recommendation. The commissions on permanent life insurance policies can be 4-8 times higher than commissions on term life insurance policies, so it’s easy to see the conflict of interest.

       Be open to permanent life insurance if you really need it, but be very wary of anyone who recommends it when you only need term life insurance. Ask why and consider if those reasons are applicable to you. Only make your decision after careful consideration.

Cash It Out If You Don’t Need It

       Finally, if you have a permanent life insurance policy but you don’t need it, then cash it out as quickly as possible. I don’t care if your dad bought it for you when you graduated high school. If you don’t need it, it’s a waste of money. Call up the insurance company and tell them you want to cash out the policy and cancel the coverage.

       Don’t buy something just because it seems like a good idea. Make sure it fits your needs and your situation first. If it doesn’t, then stay away!

Do You Need Life Insurance?

Corey —  September 29, 2009

       Before you go out and buy life insurance, you need to ask yourself if you really need it. And when you’re buying it, you need to ask yourself how long you’ll need it. Not everyone needs life insurance, and not everyone needs life insurance for their whole life.

If You’re Single with No Dependents…

       If you’re not married and you have no one who depends on your income to provide for their necessities, then you do not need life insurance. If you want to cover your burial expenses, you’re better off just saving up the money yourself. Your savings can cover your burial expenses without putting that burden on anyone else. If you’re young and you haven’t saved enough to cover those expenses yet, then you might consider a 5 or 10 year term life insurance policy. That will give you enough time to save the money yourself, but it won’t cost you very much either. (Especially if you’re only talking about $10,000 or $20,000 of coverage.) And no, you don’t need to cover your debts. Whatever your estate cannot cover will be forgiven at your death. Your parents won’t get stuck with your debts.

If You Can Self-Insure…

       To self-insure means that your assets take the place of insurance. Once you reach a point where your assets can do what your life insurance was meant to do, you don’t need the life insurance any more. This is why most people don’t need life insurance for all their life. If your life insurance is meant to replace your income but you have enough retirement savings to do that, then you don’t need life insurance. This is why a 30 year term life insurance policy will be plenty for most people if they continue to save for retirement. After that length of time, their retirement savings can replace their income if they die.

       Maybe you bought life insurance to cover your mortgage if you or your spouse die but you’re not worried about replacing your income. If your savings could pay off your mortgage of if you’ve paid off your mortgage early, then you don’t need the life insurance policy any more.

Make Sure You Really Need It

       Insurance is meant to cover a risk. With life insurance you’re usually covering the risk that you’ll die but your dependents will still need your income. If your savings can cover that risk for you, then you don’t really need the insurance.

       You should use this same logic when deciding whether you should get term life insurance or permanent life insurance. If you know you’re going to save for retirement and you’ll have a good bit saved after 30 years, then you don’t need life insurance coverage to go beyond that. A 30 year term life insurance policy will cover you until you get to that point, but you don’t need to keep permanent life insurance coverage because you can self-insure.

       Don’t get insurance just because someone tells you it’s a good idea. You need to look at your own situation and ask yourself if you really need it. If you do need it, then ask yourself how much you need and how long you need to be covered. (That is, ask yourself how long until you can self-insure.) Paying for insurance you don’t really need is a complete waste of money.