Insurance Heads-Up
Posted by John Draper | Filed under Insurance
I friend of mine recently got a letter from his term insurance provider offering additional coverage for accidental death. This is one of the latest “pushes” from the insurance world. Of course, what they don’t tell you is that under 3% of all insurance claims are paid out because of accidental death. This makes accidental death premiums one of the most profitable for companies. Buyer Beware!
The other “push” I’ve been hearing a lot about recently is the push to replace existing life insurance policies with new and improved. Be careful. Some unscrupulous brokers encourage clients to switch policies to pad their own wallets. While term costs have decreased in the last few years, you shouldn’t be swapping an existing permanent plan for a term policy, particularly if you’ve had it for any length of time.
Speaking for insurance agents, watch out for those who are allowed to sell only one company’s products. Insurance companies employing agents generally charge higher premiums than do insurance carriers employing independent brokers. Since an employee of an insurance company cannot shop for the best value for you, they may not offer the product best suited to your needs.
Remember, too, that the cheapest isn’t always the best, particularly over the long-term. So while a term insurance premium may look really cheap now, if you have to renew it a couple of times, you may be surprise at how much the premium increases over time. Look at the overall cost rather than just at the initial premium.
And watch for policy exclusions. All life insurance policies have a two-year suicide exclusion. Some also carry travel or recreational activity exclusions if the applicant was engaged in these activities at the time of application. So if you’re an avid mountain climber, the policy probably won’t pay out if you fall off the mountain.
Each insurance company has its own underwriting guidelines and having a broker who works with multiple carriers and is up to date on the different underwriting protocols is the single best way to guard against buying something that doesn’t serve you well.
Before buying insurance, answer these three questions:
1. What do you want your life insurance to do for you?
- Pay for your funeral?
- Pay off your outstanding mortgage balance or other debts?
- Offset the loss of your income? For how long?
- Fund your kids’ education?
2. Who do you want to insure?
- You can get a life insurance policy on your own life, or you can get one policy for both you and your spouse (referred to as a joint life policy), which pays when the first partner dies, leaving the life insurance benefit to the survivor.
3. How long will you need insurance?
- When will your mortgage or other debts be paid off? The amortization period of your mortgage will often determine how long your term life insurance policy should be.
- When will your family no longer be dependent on your income? No dependents may mean way less insurance.
- When will your children be finished school? One day they’ll finish their education and having enough coverage to pay their educational expenses won’t be necessary.
- When are you planning to retire? You will have less income to replace at that time.
The more cash that is available from other sources, the less life insurance you may need so you should do a complete net worth before you start looking at how much insurance to buy. People often buy a policy here and a policy there until they have an insurance hodge-podge that can be confusing and over-priced. It makes sense to have Enough insurance. It makes no sense to have too much.
December 2, 2008 at 10:11 am
Gail:
What’s your opinion on Universal Life type of insurance? I am currently paying 92 CAD a month for 250K. I am 28 years old non-smoker.
Thanks for your comments.
Emiliano
December 2, 2008 at 11:00 am
Emiliano – I’m not Gail but that sounds like highway robbery (that’s $1100 / year!). Consider term-life instead and get a 20 or 25 year term coverage instead. You can likely do a better job of investing than the insurance company can. You can get quotes online from a variety of places.
December 2, 2008 at 11:32 am
When I was a starving student, I took a soul-sucking telemarketing job (gotta keep the roof over your head and textbooks in your bag in grad school!) and I had to try to sell bizarre insurance like Gail is describing (accidental death and dismemberment). It was cheap-a few dollars a month on your credit card-but I was always surprised when people actually bought it. I wondered what the odds were that you would die in an accident, and from what Gail says, I had the right idea. If they rarely have to pay out, the insurer was taking everyone’s “few dollars” and having a party with it! I was also always shocked that people would buy odd insurance over the phone from someone they had never met, without reading the fine print…I guess I’m kind of anal that way!
December 2, 2008 at 12:35 pm
Gail, are you saying that because under 3% of all insurance claims are paid out because of accidental death it is not worth covering yourself for this risk? I think 3% of all insurance claims must be a significant number.
December 2, 2008 at 5:03 pm
Good questions to ask! Finding a reliable source on issues like insurance is so tough. Geoff, what do you consider a reasonable amount to pay? I’m new to this. Thanks!
December 2, 2008 at 5:08 pm
Ugh, when my dad passed away in April I found out that his life insurance was an accidental death only policy, which was just utterly ridiculous for a 63 year old in poor health and on a fixed income. He would have been better off just keeping the money he spent on the coverage for himself.
December 2, 2008 at 6:30 pm
Emiliano: Don’t react to what Geoff said and go out and cancel your policy. As long as you bought the policy for the right reasons (i.e., you want to keep the policy in place for the rest of your life) then your premium isn’t outrageous in light of what you’re getting.
Geoff: Term doesn’t suit everyone; it’s a matter of what you need and what works best for YOU. If you plan to keep your insurance in place first as income protection and then as estate protection then a whole/universal life policy is exactly the right choice. Try buying/renewing term insurance at age 60 and see what high premiums look like.
When Ken found himself with a young family and not enough insurance, he ended up coughing up over $3K a year just to get the coverage he needed to see his new family through to the end of high-school because he was 50+! And that’s without estate protection.
December 2, 2008 at 9:29 pm
I think Gail is right when she says to buy the policy for the right reasons. We are in our late 40s/early 50s. About 8 yrs ago we bought a Universal Life insurance that we pay $200 / month. The fee stays the same until our death – yet we are also growing some funds too. We also have $400K 10 Yr Term for while we own this big house and have 2 kids to put through university. Once the 10 yr term is up – it’s done with. Then we move and scale down, no longer needing that type of insurance.
The point is ‘know yourself’ and your situation best and get at the least, 2 different opinions from brokers + do our own research. We don’t just blindly do as others tell us to do – even our dear Gail. We think for ourselves and do the research.
December 3, 2008 at 1:50 pm
Gail – I recommended Emilani *consider* term life instead, not go out and cancel anything. I guessed based on his question that he was a little unsure on his options and he should broaden his knowledge. Asking for a quote never hurt anybody. It’s impossible to decide what’s best for you without knowing what options you have, and am a bit concerned that a life insurance salesperson/advisor had just told him what to do and what to get and glossed over the huge fees and poor investment returns insurance companies make.
As for the estate protection offered by whole life – well true but really only applicable if personal assets exceed $2 Million dollars. RRSPs are now protected from bankruptcy claims so unless Emilano is maxing out his rrsps and is raking in the cash it seems this is a superfluous benefit – and if he is making that much his $250K coverage is far too low.
Now your final point – about getting life insurance at the end of the term – that’s a good point to consider. But I have no interest in life insurance at 60; either all my liabilities will be resolved by then or I will have far more pressing financial obligations to deal with than life insurance if they’re not. Personally I can’t imagine anyone planning on needing life insurance in their 60s; most policies terminate at age 75 regardless.
@ Saver Queen – My wife and I (non smokers, early 30s, average health/weight) have a $250K coverage for the two of us for $560 / year for a 20 year term. What I would ask Emilano is how many companies he called for a quote before accepting the one he took.
@ Shannon – a similar story. My father paid insurance from age 60 to 75, $1000 / year, and he turned 75 and policy was cancelled. He’d have been far better advised to invest, keep or even spend the $15,000 he gave away.
December 3, 2008 at 8:43 pm
Thanks Gail and Geoff….
Gail: what I liked about the universal life insurance is that part of the premium is invested and i could get that money if i needed let’s say in 20 years, for my son’s education…
Geoff: I didn’t like term, because even though it was cheaper, it was just for a TERM… and it kind of scared me for some reason.
Since I was paying that robbery insurance that banks put on the mortgages, and on the lines of credit, i cancelled them, and i decided to just have one insurance…
Thanks for answering me, and thanks Gail for the example of that other guy… for sure I would not be able to get insurance when I am 60 if I would have gone with Term… I am very happy !
December 4, 2008 at 5:04 pm
Emiliano – the first question should be “Do I think I will need insurance at 60?” before being concerned about not being to get it. As long as you answer that then I think whatever decision you made is great.
In a way, all life insurance is for a term — some are fixed and some are variable depending on when – not if – we die.
January 14, 2010 at 2:20 am
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