Dear Mr. Market:
We’ve used many quotes in the 91 letters that we have written to you over the last few years. They’ve covered a variety of topics and issues that investors are faced with as they attempt to navigate through the current economic environment. Today we look at a famous quote from one of our country’s founding fathers…
“In this world nothing can be said to be certain,
except death and taxes.”
– Benjamin Franklin
Imagine if there was a product that addressed both death and taxes? Not to scare you away from this article … but there is. Individuals will typically avoid discussing it, if at all possible. The product is Life Insurance, owned by many but truly understood by few.
The Life Insurance industry has certainly not done itself any favors over the years. Individuals often experience a pushy sales process that is based on fear tactics and playing on emotions. Who really wants to sit down and discuss what will happen when they die? In an effort to serve individual needs, life insurance companies have created a plethora of products with different bells and whistles often leaving the potential client confused and completely overwhelmed. Rather than dig into the various products we will address 10 of the most common myths that are associated with Life Insurance and discuss their validity.
1. Everyone needs life insurance
The two most basic needs that life insurance assists individuals with are: providing for dependents and covering estate taxes at death. If you don’t have dependents or an estate valued over $5.43 million (for tax year 2015), you may not need life insurance. Throughout life your financial picture will change and your life insurance coverage needs to be adjusted as well; policies can be revised and cancelled, if needed.
2. Only the primary breadwinner needs insurance.
Insurance is often sold through fear tactics – What happens if the majority of a family’s income is suddenly lost? It could certainly be devastating but take a moment to look at the other side of the coin. What happens if the ‘stay-at-home’ spouse were to pass away? The primary breadwinner would need to hire someone to take care of children and other tasks around the house. Families should consider the option of having an insurance policy on both spouses with different coverage amounts based on the family dynamics.
3. I have a policy through my employer so I am covered.
Your employer might offer a life insurance policy that equals one to three years of your annual salary. While this is certainly a nice benefit it should not be viewed as the end all solution to your insurance needs. According to the Bureau of Labor Statistics the average U.S. employee will stay at their job for 4.4 years and millennials are expected to be half of that. The majority of insurance provided by employers does not move with the employee when they change jobs and if it does it can become much more expensive. If you have a need for insurance consider buying your own so that you are in control of it and not dependent on your employer.
4. My health disqualifies me from owning life insurance.
Many insurance companies today will cover a wide range of health conditions. Several specialize in high-risk policies where you will pay more but coverage might be possible. There are companies that will also offer policies that have no medical underwriting associated with them – these will obviously cost significantly more. With advances in medicine and research, the insurance industry will now consider some policies that would have been quickly dismissed just a few years ago.
5. I can’t afford Life Insurance.
Recent surveys from LIMRA (Life Insurance and Market Research Association) found that most Americans realize they need life insurance but only 10% planned on buying it. The majority of those surveyed said the primary reason is that it is simply too expensive. Of those surveyed 80% drastically overestimated how much it would cost them. Some thought that a $250k policy for a healthy 30 year-old would cost $1,000 a year or more. In reality it would actually cost less than $200 per year with most insurance carriers. Rates have dropped substantially over the last decade and life insurance has become much more affordable.
6. Everyone needs coverage to replace lifetime income.
This is one of the most popular methods to raise awareness and generate sales for Life Insurance agents. It has proven to be effective and also can lead to enormous policies and large paydays for agents! Just think about how much the average person can make over their entire lifetime! Rather than looking at such a broad picture consider what your liabilities are and who is dependent on you. If you have one child that is 16 years old the argument could be made that you need six years of coverage so that they would be able to graduate from college. With disciplined savings and investing many people can ‘self insure’ themselves and find that they no longer need to pay for excessive coverage.
7. I am too young to worry about Life Insurance!
The longer you wait to buy life insurance the more expensive it gets! The other factor that comes in to play is the increased chance that individuals will develop health issues and/or habits that will increase their premiums the longer they wait. Procrastination with life insurance only adds up to significantly higher premiums.
8. I will pay less if I buy life insurance on the Internet.
Our society has become comfortable conducting a high percentage of personal and business transactions online. While shopping insurance rates on the internet is a great way to start and get quotes many people would actually benefit more by working with an experienced insurance professional. A website is not able to navigate you through your own unique situation and offer options that you might not have even considered. A professional agent will know which companies specialize in different situations or conditions and could save you money in the long run.
9. Once I buy it I can file away the policy and forget about it.
It is common that once the policy is in force that the individual files it away and completely forgets about it. If you experience any change to your financial situation (for example: death, birth, marriage, divorce, inheritance…) you should review your policy to see if it needs to be updated or revised. It is also a good idea to consider giving your policy a complete review every two to three years. Rates have dropped and competition has increased, which can be very beneficial to the policy owner. Often individuals can purchase the same amount of insurance and lower their payment or continue making the same payments and increase their coverage.
10. “Buy term and invest the rest”.
This is a popular saying with Investment Advisors and is often an accurate one. Because there has been a struggle between insurance agents and investment professionals for business, it’s unfortunately the client’s best interest that is completely lost. Term insurance is for a set amount of time and costs less than a permanent policy. This catchy phrase is based on the concept of paying the least you can for insurance (term) and then investing what you save. There are certainly situations where a permanent policy is appropriate and should be considered. A few situations where this makes sense are: Business owners with ongoing coverage needs, providing for a special needs individual, and most commonly to assist with estate tax liabilities.
Your financial situation is unique and one solution does not work in every scenario. The life insurance industry is notorious for high turnover and poor service. Take the time to find a professional that knows the industry and is truly working with your best interests in mind and not focused on lining their pockets. If you don’t know of an individual then ask for a referral from one of your other trusted financial professionals. Instead of jumping online, opening the phone book, or even taking a blind referral from a friend who may have been sold, choose to work with someone that is focused on you and addressing your specific needs!
We started with a quote and we will end with a quote from one of the most prolific insurance salesman, Ben Feldman. He reportedly sold $1,800,000,000 of insurance for New York Life during his career. This quote is directed towards insurance agents but consumers should also keep this in mind when considering life insurance.
“Don’t sell life insurance.
Sell what life insurance can do.”
– Ben Feldman