Saturday, January 06, 2007

My view on life insurance

Prior before working in the financial service industry, I just graduate from college looking for a job. Life insurance was never on my mind. Making money was all I thought about and finding a way to build lots of wealth was on my agenda. When I join this company, I would soon find out how many families in America are being screwed. Not just on life insurance, but also mortgages and credit cards. With debt rising in many families, the need for life insurance is important to protect your family. If you die, someone is going to have to pay your debt, which is most likely to be your family.

I believe that life insurance is a necessary tool to have when it comes to financial planning. If you have kids that are dependent on you, why don't you have life insurance? You see, you need to think about others around you in case something happen to you. You are the parent providing a large source of income for the family. God forbids something happen to you, that income won't be there any more. With life insurance, it can prevent that devastation of lost of income.

If you are single, you probably asking why would I need life insurance? First, you are probably a healthy person and a young adult. You can lock in that low rate if you buy life insurance now. The older you get, the more expensive it becomes. Second, your parents or your brothers or sisters probably don't have much save toward retirement. In case something happens to you, they can use the money. Hopefully they will make a wise decision by investing it toward their future instead of spending it right away. I bought a 30 year term insurance at age 23 because that's what I was able to afford at the time. I was single (and still single as I write this blog) and wasn't making much money. I have $150,000 coverage and pay about $25/month for it.

While there are many kinds of life insurance out there, I believe that term insurance is the best way to go. I'm not a life insurance agent, but I do sell term insurance. I'm more of a financial planner or analyst. Life insurance agents say that term is a temporary insurance and premiums will go up when it expires. While that is true, you should compare the cost over time and the value you gain, which I posted in this blog: (click here). Another objection I hear is that term insurance rarely pays out death claim. I don't know how the life insurance agent would know that term insurance rarely pays out death claim. Do you know when you going to die? In 2006, my company paid out over $825 million in death claims. From 1977 to 2006, the company has paid out over $10 billion in death claims. My company never sold cash value life insurance, only term insurance.

You see, life insurance agents will make up every possible reasons to make you buy cash value life insurance instead of term insurance. Why is that? Simple answer: Cash value = big commissions, term insurance = very little commissions. There's an old saying: "If you sell cash value life insurance, you can't sleep. If you sell term insurance, you can't eat." Did you know that most life insurance agents own term insurance and they sell cash value life insurance instead? I can't blame them for wanting to sell cash value life insurance. The company probably pressure their sales force to sell expensive life insurance. When you sit down with a life insurance agent, you should ask what kind of policy he/she has and ask to see it. If they try to sell you a life insurance with a savings plan in it, ask "wouldn't it better to keep my savings separate from life insurance?"

Life insurance agents tend to come back to you to sell you more life insurance policies if you are the client. I seen where one couple had over 10 different life policies on themselves and some more on their kids. That doesn't make any sense to me. Someone is getting rich and the family is left behind in the dark. I believe in doing the right thing for the client by providing the right amount of coverage for the lowest possible cost. I can only achieve that by selling term insurance and help the client invest their money in tax-deferred accounts.

I also believe that you don't need life insurance forever. As you get older, your financial obligations will decrease. Your kids get older, your mortgage is paid off (hopefully before you retire), and you don't have much credit card debt. You are nearing retirement and so, you better have lots of money saved otherwise you will be working for life. So, you going to need to save every bit of money as much as possible. If you still need life insurance when you retire, then dramatically decrease your coverage to $10,000 to cover funeral expenses.

So things to keep in mind when you are considering life insurance:
1) You need to ask yourself why do you need it and who is going to benefit from it in case something happens to you?
2) Term insurance is the best way to go to protect your family. It's even better if you invest your money too in money market accounts, IRA, 401k, etc. Cash value life policies are unable to do this, that's why that when you want to use the cash value, you have to borrow it.
3) Some of you bought life insurance from a family member or from a close friend. You should ask him or her what kind of life insurance does he/she have? It's even better to ask all life insurance agents what kind of life insurance do they have and if it isn't term, ask to see their policy.
4) If you buying term insurance from a life insurance agent, be careful of what kind of term insurance. Most will sell you a 5 year or 10 year term because its very cheap. For a million dollar policy on a 10 year term, you probably would be paying $20/month for it. Few years later, this agent will come back to you and sell you a whole life policy. They will probably say at that time, "you see? Term insurance is expensive! You should buy whole life because premiums remain fix for life!" Which goes with their reason why they think term insurance rarely pays out. It's because they sell a very short term insurance. Get a 30 year term insurance if you can or at least a 20 year term. The cost of a 20 year term or 30 year term is always going to be lower than any cash value life policy over time.
5) You want to purchase life insurance from companies that has strong financial rating from AM Best. AM Best ratings are listed as follow (from superior to poor): A++, A+, A, A-, B++, B+, B, B-, C++, C+, C, C-, D. You want to avoid companies that falls below the B+.
6) Every cash value policy is a term policy to age 100 with a savings plan in it. Your premiums are being paid for two things: term insurance and cash value. The problem is, in most cash value policies, you don't know how much of your premiums is going into each part.