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5 tips to understanding life insurance

Like most Americans, Capital Region residents don't know the basics of a fundamental part of family financial planning. And it's not their fault; where were we taught?

Life insurance, full of misunderstandings, is nevertheless critical to families.
Photo by Gabriel Olsen/Getty Images for John Varvatos

Follow these guidelines:

  1. Buy adequate coverage. Strive for enough to really protect your family. Most experts recommend five to 10 times your annual income. It’s tempting to procrastinate or squeeze by with less protection. No one ever thinks tragedy will strike. But the point of insurance is to protect your family in the event of a tragedy! Thousands of families are now struggling because they didn’t take protection seriously.
  2. Buy only one policy per family. Life insurance policies generally have a fee that pays for processing and administration of each policy. This can be as high as $50-$100. Separate policies mean separate fees. If you have separate policies on yourself, your spouse and your children, you could be losing money!
  3. Avoid life insurance on children. Life insurance on children isn’t necessary in most cases. The coverage on the adults will provide for the children. If you really feel it’s necessary, buy only enough for burial expenses. And remember to purchase the coverage as a “child rider,” not as a separate policy.
  4. Avoid expensive “gimmicks” like Return of Premium. Remember that extra options on your policy mean extra costs that can prevent you from buying the maximum protection. One possible exception might be a Waiver of Premium benefit, which provides for payment of your premium if you become disabled for a period of time.
  5. Avoid insurance policies disguised as something else. Some companies offer various types of specific-coverage insurance, such as mortgage insurance. These are nothing but life insurance policies. If you want to assure that your home would be paid for in the event of your death, simply add more coverage to your primary insurance policy. The same is true of short-term life policies like credit life, which is nothing more than an expensive form of decreasing term. Although the term policies that convert to whole life may sometimes leave the impression that this is required, it’s not!

The secrets of life insurance need not remain secrets. Facts are too important to building a solid financial house, which starts with the foundation--life insurance.

Dave Balog teaches financial wellness to families. 355-0967.

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