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The fundamentals of life insurance
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The life insurance industry has been around in one form or another for hundreds of years (and I’ve been a part of it for the last 17). But as the world moves faster and products become more sophisticated, we tend to get caught up in the whirlwind of “new and improved” and occasionally lose sight of the fundamentals. This was brought home to me recently in an unfortunate way.
I received a call from a young man who was referred to me by his auto insurance agent. He wanted to buy life insurance but didn’t know what to buy, how much to buy or even where to start – he needed help.
But what really struck me was the reason he had been spurred to action: just two days prior to his call, he had lost his 29-year old wife to pneumonia. Now, he and his two young children were on their own and sadly, his wife didn’t have any life insurance benefits available to ease the financial burden this family was facing.
The only certainty in this man’s life at that moment was he knew he had to buy some life insurance. In his words, “There is nothing I can do about what happened with my wife, but there’s no way I’m going to put my children through this.”
I tell this story for one reason: the life insurance industry has done remarkable things with the products they create and sell. They are more competitive than ever and can provide some very unique benefits beyond the life insurance protection. But at the end of the day, the only thing that matters is having something in place should the unexpected happen.
So, the interest of getting “back to the basics,” there are two categories of life insurance you can buy (outside of coverage that can be purchased through your employer):
The first is called term insurance. Term insurance is basic death benefit protection designed to provide coverage for a specified length of time. In most cases, it provides the largest amount of life insurance for the lowest cost. Keep in mind, however, term insurance is temporary – at some point in the future (anywhere from 10 – 30 years depending on the policy you choose), premiums will either increase substantially or coverage will cease.
The second type of life insurance is a broad category called permanent insurance. This is the category that many people refer to as “whole life” but there are all kinds of variations available. Permanent insurance usually has some type of cash value component that allows you to build some equity that could be accessed in the future. While permanent coverage is generally more expensive than term insurance, it can potentially stay in place until age 100 (or longer).
Today’s world can overwhelm all of us with too much information, paralyzing us into indecision. We put off making a choice because we do not know where to begin and we are afraid to make a mistake.
Always remember that with life insurance, the type of coverage you buy for the benefit of your family is not nearly as important as just making sure you have something.
The best type of life insurance? The type that is in effect when your family needs it most.
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