By Scott Brown EBS CONTRIBUTOR
In this fast paced life most of us lead, sometimes we forget or conveniently neglect personal and professional risks staring us in the face. In many cases, these risks can be addressed by different types of insurance. As a financial advisor I have assisted clients with protecting or hedging many types of risk throughout my career.
Interestingly enough, one of the more challenging conversations to have with clients is regarding life insurance coverage. Sometimes people are uncomfortable discussing their own or a loved one’s mortality, while others feel they don’t need it, or don’t believe in it. Still others lump insurance professionals in with other careers that the public considers dishonest or view negatively.
Finally, many believe they already have enough through their employer. Regardless of whether or not one believes they need coverage or even if they want coverage at all, it is still a very important conversation as it relates to the larger discussion of comprehensive financial planning. Very simply stated, it is necessary to improve your basic knowledge of personal finances and how to protect your wealth and the wealth of those you care about and love.
The fact is, most people will have a need for life insurance at some point in their lives. It is also true that most people young and old alike want to live life to the fullest! Does anyone else hear Van Halen’s David Lee Roth belting out “I live my life like there’s no tomorrow…”
So what is life insurance? Life insurance is a contract between an insurance policy holder and an insurer, where the insurer promises to pay a designated beneficiary a sum of money in exchange for a premium, upon the death of an insured person. The policy holder typically pays a premium, either regularly or as one lump sum.
When considering life insurance, the first question that needs answering is, do I need life insurance? Let me answer that question with a question: Will someone or something (a family member, a family business, a business partner or perhaps charity) suffer financially if you die? If the answer’s yes, then you may need life insurance.
If you know you need coverage you may ask, don’t I already have life insurance through work? Maybe you do, however, it’s typically not enough to meet most people’s needs especially if you have or plan on starting a family.
Continuing, as both your family and career grow you may ask, how much insurance coverage do I need? Everyone’s financial goals and needs are different, so there’s no hard and fast rule of thumb. Different factors for consideration include the size of your family, family member’s ages, day-to-day basic living expenses, longer term needs like paying for college, paying off a mortgage and a comfortable retirement for your spouse. When you consider all the varying needs your family has, you may find you actually need somewhere between five to 10 times your current annual income in total coverage.
Another question some of you readers may be asking yourselves is what kinds of life insurance are there? The short answer to this is, there are many different kinds of life insurance products, each offering varying benefits. That said, there are two main categories: Term and Permanent.
Term insurance provides protection or coverage for a specified period of time, say 20 years. Term could work for insureds hoping to cover their peak earning years and their kid’s college for example. Permanent insurance offers you lifelong protection, including a death benefit and the added advantage of accumulating cash value that’s tax deferred. It’s like having insurance and an investment in one policy. There are many types of policies including whole life, universal life and variable universal life just to name a few. These policies may also help with some estate planning needs as well.
At this point you may be asking; how can I get life insurance? In addition to employer-provided life insurance (should you have that as an option), you can purchase insurance directly from a provider, via online, over the phone or by mail, or through an intermediary, such as an insurance broker or financial advisor.
Another important question is simply, how much does life insurance cost? Insurance rates (premiums) are based primarily on life expectancy and there are a lot of factors that go into figuring that out. These include your gender, current age, health and health history, as well as your lifestyle (smoking, alcohol consumption, extreme sports activities like sky diving, scuba etc.). That’s why it’s a good idea to buy life insurance as early as possible. The longer you wait, the more rates will increase based solely on your age.
Many people ask what does life insurance cover? Well should you die, the proceeds of the policy can be used for almost anything, like paying off outstanding debt (mortgages, credit cards, car payments), household bills (rent, utilities, maintenance), healthcare expenses, college tuition, family business continuity, funding a spouses’ retirement plan, funeral costs etc.
As a potential next step, I have complied a list of good questions to ask about a life insurance company including, is the company financially sound? Look for a company that has shown financial strength as judged by major rating agencies such as AM Best, S&P, Weiss and Moody’s. This is important because the financial ratings reflect the life insurance company’s ability to pay claims in the future.
How long has the company been selling life insurance? A company with years of experience may be better able to help you find a life insurance solution that works for you and your family. What can the company offer me? Companies have different areas of focus or expertise and therefore the terms and pricing of policies may differ widely depending on each policyholder’s situation and the insurer’s business structure.
What will I be required to do? Ask about medical exams and personal financial disclosures and the overall application process, which may include other required steps and disclosures. Finally, what is their customer support like? Good customer support is essential as you want to make sure that the carrier will take your situation seriously to ensure a smooth and easy experience from the time your application is submitted to when you receive your policy contract. Maybe more importantly, in the event of your death you want to feel confident that the insurer will work closely with your family in a caring an empathetic manner and to pay the death settlement as soon as possible.
For some reason, thinking about life insurance coverage always reminds me of the famous James Dean quote “Live fast, die young, and have a good-looking corpse.” Of course, I simply want all of you to enjoy the ride of your entire life whether its cut painfully short or long, fruitful and full of meaning surrounded by the people and things you love! Until next time be safe and have fun out there!
Scott L. Brown is the cofounder and managing principal of Shore to Summit Wealth Management. His wealth management career spans more than 25 years and he currently works and lives in Bozeman, MT with his wife and two sons.