Researching life insurance
Posted
Jun 02 2009, 06:58 AM
by
Karen Datko
Rating:
This post comes from Jim Wang at partner blog Bargaineering.
I'm 28 and I don't have life insurance. Many people don't begin thinking about life insurance until they start a family, and I'll be no different. While we don't plan on starting a family in another year or so, it's important to learn about things before you need them -- before emotion and time pressure begin affecting judgment -- and recently I spent some time looking at life insurance.
How I chose term vs. whole life
There are four types of life insurance: term life, whole life, universal life, and variable life. (My earlier article discusses what each one is.) I want insurance to cover the catastrophic problems; I'll self-insure against the everyday and more routine problems. Some life insurance policies have a death benefit aspect and an investment/annuity aspect. But I also like clear segregation between the various aspects of my life, which is why I want to keep my life insurance simple.
My goal for life insurance is that I want my family taken care of in the event of my death. Nothing more, nothing less. We currently have one major financial obligation, the mortgage, and while my wife's income could make the payments, it's certainly made a bit harder with me gone. If I were to die before we pay off the mortgage, then I want the loss of my income softened with insurance. I'd say my death is pretty catastrophic, right?
Since I just want a death benefit and no fancy investment component, my main choice is term life insurance. The main difference is that term life insurance has a set term (number of years between one and 30) and a set benefit ($X). You pay monthly premiums, and should you die before the term is up, your heirs are paid $X. If you don't die, they don't get paid.
Why do some experts advise against whole life? Whole life insurance has an investment component, and the main reason why people advise against whole life insurance is because you're often overpaying in fees for that investment component. Whole life isn't wrong for everyone, but here's a SmartMoney article comparing term and whole life insurance.
Getting life insurance through your job
Many employers offer free term life insurance as part of their benefits package. They offer basic term life insurance and also supplemental term life insurance. For the basic, they usually pay for a policy that is a multiple of your base pay, so it's a no-brainer to accept that insurance policy (it's free).
The supplemental insurance is something you can get if you want additional coverage. The nice thing about the supplemental life insurance coverage is that it's guaranteed -- you don't need to get a physical to be approved. The not-so-nice thing is that it's not subsidized, so you're paying for it 100%. So, if you have health problems that would prevent you from getting life insurance otherwise, it's a good thing if you want term life insurance.
Getting term life quotes
Since I am self-employed and I'm cheap, I don't offer free term life insurance to myself. The next step is to start requesting quotes for a $500,000, 30-year term life insurance policy.
I first broached the issue of life insurance when I reviewed and changed our home and auto insurance policies to State Farm. While talking to the agent, I asked for term and universal life insurance quotes for our own edification. There are three insurance classes for term life insurance: standard, preferred, and super preferred. Each insurance company classifies the insured differently and as you move from standard to super preferred, the premiums decrease.
When you apply for life insurance, you have to submit to blood work, physicals, etc. The results of those tests are then sent to the insurance company and they determine what class you belong in (if any). The classes differ from company to company. When a broker quotes you a rate, chances are it's the preferred rate.
The term life insurance quote for me was $54.83 a month for preferred term life insurance.
We have our starting point.
I turned to NetQuote, a site I first read about on Kiplinger.com, and within minutes had life insurance brokers calling me up with their quotes. What's funny is that many of those brokers were using the same system, rattling off the same information, but the most informative and least salesy call was from MetLife. He gave me the following quotes (preferred):
- TransAmerica: $42.
- MetLife: $45.36.
- AIG: $45.50.
- West Coast Life: $45.50.
The MetLife rep also told me about a "return of premium" policy, where you would get all of your premiums paid back to you in the event the term expired and you were still breathing. He gave me a quote from Lincoln of $76.13 for the policy (which was the same price as the non-return of premium policy from Lincoln). If I paid $76.13 a month to Lincoln, it would cost me $27,406.80 for 30 years of monthly premiums. Should I see the other side of 58, I would get all of the $27,406.80 back.
While that's appealing, would I be better served taking the $34 difference in premiums a month ($76 - $42, TransAmerica) and investing it? After 30 years, assuming 8% annual growth and $408 in annual contributions, the investment would yield more than $46,200. Cut away 25% for Uncle Sam, and you end up with $34,650, which puts you ahead of the premium life insurance plan and you retain control of your money. (For those interested, the breakeven point is at an annual appreciation of 6.35%.)
Summary
I won't be getting life insurance just yet, but I have learned that it's important to start the process early because there's an application process involved. At least with State Farm, there is a medical exam where a nurse would come to me (at no cost) to take blood pressure, urine sample, blood sample, and perform some other medical tests -- a 15-minute process. A telephone interview would also be included to determine past family medical history.
Have you purchased life insurance? If so, what kind and how was the application process?
Related reading at Bargaineering:
Keep investments and insurance separate
What happens if my insurance company fails?
4 types of life insurance: Term, whole, universal, variable
