The only reason you need life insurance is to solve a problem.
“Generally the problem that life insurance solves is to provide assets for your family in the event of your death,” says David Martin, CPA, CFP, ChFC, senior vice president and director of wealth management consultant, Trustmark Wealth Management in Jackson. “Basically what that means is should I die, will my family have enough money to maintain their standard of living without my earned income? Will they be able to pay for their housing, food, clothing, education, weddings and cars? Life insurance provides funds for the family to take care of their needs.”
It is a good idea to re-evaluate the amount of insurance you purchase for a variety of reasons. Martin says as you age the amount of life insurance you need for survivor income declines for a number of reasons. One is that your children are now older and you have less of a support obligation for them. Two, your spouse is older and you have a smaller number of years to support him or her.
“Most importantly, hopefully you have built up some savings and net worth that can be used to support your family should you die,” Martin says. “You probably have a nice 401(k) plan and other assets.”
For someone with young children, the rule of thumb is insurance five to 10 times your annual earnings. More might be a good idea if you have significant debts.
A second important reason to own life insurance is to pay off your debts in the event you die. People have life insurance to provide cash to repay debts for a home, car or business.
The third reason people have life insurance is if they are in business with a partner or multiple partners. Partners commonly buy insurance on each other. If a partner dies, the surviving partner has a life insurance policy to buy the partner’s share of the business. Martin says this can prevent a lot of disputes between the surviving working partner and the decreased partner’s family. The surviving partner is trying to grow the business or get out of debt while the deceased partner’s family usually wants to get cash for their share of the business.
“The last reason to own life insurance is to provide liquidity to pay estate tax,” Martin says. “Say in your lifetime you build a successful network and wind up owing estate taxes. A number of people have life insurance to provide liquidity to pay estate taxes, which are due nine months after death. Many people have a lot of real estate, which is not easy to liquidate. They don’t want their family to have to sell real estate to pay estate taxes.”
Martin says if you don’t have one of the four needs — income for your family, debts to pay off, business continuity and estate liquidity — then you don’t need to purchase life insurance.
“My advice is to discover what problem you have and if you need life insurance to solve it,” Martin says. “If you don’t have one of those problems, then you don’t need life insurance.”
He sees people getting hung up over what kind of life insurance to buy. He thinks it is more important to focus on getting the right amount of insurance.
“Make sure you have enough insurance to help your family, and don’t focus on term life, whole life or universal life,” Martin says.
Generally most people should own some term insurance. Term insurance rates have dropped between 45% and 50% in the past decade.
“Term insurance has gotten cheaper over the past 10 years,” Martin says. “So if you have an old term life policy, something purchased prior to 1997, you may want to review it. Even though you are older, you might be able to save a significant amount of money. Just yesterday, I worked with a group of businessmen paying $21,000 for their term insurance, and they could get better coverage for $12,000 today. Anybody with term insurance should at least look to see if their premium is too high.”
Glenn Galey, who heads the SouthGroup Insurance office in Hattiesburg, says most people don’t review their life insurance program on a regular basis.
“Therefore, often we find they are underinsured,” Galey says. “It should be reviewed every three to five years, and if they have any major changes in their businesses or their life then they really ought to sit with someone who is skilled in the area of life insurance and review their present needs and program. The best thing to do is find someone who does have expertise in life insurance. And once you determine how much insurance is needed, ask the person to shop for the life insurance coverage because that person will know what companies have the insurance they need at the most competitive price.”
Galey says barriers to people obtaining life insurance may be more because they are busy and have difficulty finding time to consider a policy more than wanting to avoid thinking about the unpleasant possibility of early death.
“Most of us don’t think in terms of something happening to us tomorrow,” he says. “Unfortunately, if we have not planned, that is when our business or family needs are not promptly attended to.”
Determining what kind of life insurance to purchase doesn’t have to be difficult. Dr. Steven Weisbart, an economist with Insurance Information Institute, recommends term life for people whose needs end after a certain period of time.
“If the need never ends until you die, you need permanent insurance, typically whole life or universal life,’ Weisbart says. “The most important thing is to decide how much to buy. That is also a function of what you need. If you have people who depend on your income, then the right amount to buy is the amount that replaces your income. Of course, you don’t have to replace all of your income if you have other sources such as the Social Security benefit. Social Security will pay a benefit as long as the children are under 18 years old. And some people have life insurance from their employer.”
You don’t have to buy life insurance as an individual if you are covered by an employer’s plan. But Weisbart says many people are underinsured. He recommends if they can’t afford the premiums for whole life, then they should probably buy term insurance until they can get to afford the premiums for a permanent policy.
Getting the advice of an expert is also helpful.
“People should try to find a good life insurance advisor to deal with, someone they trust,” Weisbart says. “Life insurance can be a complicated product, and it helps to have someone you can trust explain things to you.”
He also recommends shopping around because life insurance is a very competitive business. But when you shop, one of the most important things is to be sure you are shopping amongst financially strong companies. You are buying a policy that will be in effect for perhaps 20 or 30 or more years. You want assurance the company you are purchasing from will be around that long.
“You want to buy from a company that has high ratings from independent rating agencies,” Weisbart says. “More information about those ratings is available at the Web site www.iii.org. Customers probably would be better off choosing companies that are members of the Insurance Marketplace Standards Association. Most of the major companies belong and many smaller companies belong. Why this is valuable is these companies behave in ways that tend to provide better service for customers.”
There are some bad players in the insurance industry, so caution is advised. Be aware that offers in the mail or inserts in newspaper that advertise really low rates are many times only available to a very small percentage of potential buyers who are exceptionally healthy and have a very strong family health record.
“If you qualify, that is great,” Weisbart says. “But in some cases those rates would be available for only 5% to 10% of potential buyers. It is reasonable for companies to advertise their best rate, but it is important for customers to recognize that not everyone would qualify for that rate.”
Contact MBJ contributing writer Becky Gillette at email@example.com.