Ask Chuck: How To Buy the PERFECT Insurance Policy
To learn Biblical answers to your financial questions, you can #AskChuck @AskCrown your questions by clicking here. Questions used may be lightly edited for length or clarity.
Dear Chuck,
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My father recently passed away in an accident and a whole life insurance policy he had is providing some financial relief to my mother, though unlike some other policies they had, it did not pay more for an accidental death. But a term life policy my mother had ended and all that money they paid was lost, and no benefits will be available at all, and now because of my mother's health, she can't get another policy to help with some family obligations that will continue. That seems wrong to me. Can you explain how to pick an insurance policy and what to keep in mind when considering a purchase?
Confused and Uncovered.
Dear Confused,
First, let me express my condolences on your loss and my hope that you are finding comfort from those closest to you. And second, great question, because making an insurance purchase is a lot more complicated than television spokespeople can lead you to believe.
There is only one way to make the perfect insurance choice — by knowing the day of your death!
People buy insurance trying to make their best guess about what resources will be needed should a tragedy occur, but because we don't know when or how this might happen, choices must be made based on resources, health and family circumstances.
Looking at life insurance policies, there are two main types of insurance, Whole Life/Permanent and Term Life. A term policy is set for a certain timeframe (a term) and then it ends, while a Whole Life/Permanent policy will pay whenever you die. It is wise to get some advice from a financial expert when making such a purchase, and if you're concerned you're being pushed on any one direction, get a second opinion. This kind of purchase requires you to think through your family's needs and your budget.
While all kinds of financial gurus and media commentators will take strong positions regarding certain financial products, remember that financial products are just tools, designed for specific purposes. Sometimes you need a hammer, sometimes a drill, sometimes a bulldozer. You evaluate financial tools based on need, so start this process by having a sober look at your needs and keep an open mind about the tools available until you evaluate all the costs and benefits.
Begin by having a budget in place, because to buy any kind of insurance is to take on a financial commitment. Crown has a free calculator to help you determine just how much insurance you might need, and you can find it here.
Term policies usually go for 1, 5, 10, 20 or 30 years, and are cheaper than Whole Life/Permanent. They are usually better on a budget and can be designed to be in affect when your needs are greatest, such as to payout to your surviving spouse when your children are young. But it's widely known that about 95 to 99 percent of the time, people who buy Term insurance never see a payout because either they let the policy lapse or they live longer than the term set.
That's what happened to your mother – she lived longer than the term, and the contract came to an end. It's a risk you take with such a tool. It is not wrong or immoral, just a consequence of how the policies are sold. One reason that people take a risk on term insurance is that they might assume that other income will be in place, like retirement income, for example.
Whole life costs more because you purchased a policy designed to provide a death benefit up to age 120 (Whole Life/Permanent products used to insure you to age 100 and then people started living well beyond age 100 due to medical technologies and modern health care). Whole Life/Permanent insurance policies are more expensive because you are paying the average premium required to cover the cost of insurance over much longer periods of time.
In short, a policy that covers you for up to 120 years will cost more than a policy designed to cover you for 10 years. But as you found with your father's accident, that money was there for you.
To get a higher payment for an accident, which can be arranged, your policy would cost more, so it sounds like a judgment call was made to not pay the additional premium required to pay an extra death benefit if the cause of death was an accident, but you would have to verify that with your mother and agent.
Things to keep in mind with Term versus Permanent/Whole insurance are cost and need. You may not be able to afford higher premiums for Whole Life/Permanent life insurance so you choose a Term policy to provide resources when the need is greatest. But let's say that your parents had a handicapped child who would need life-long care. In that case, something permanent might be required to provide resources for that child after their death.
An important question to ask is what will my family need if I died at 40 or 50 or 60 or beyond? That answer probably changes as your children become self-supporting and your spouse perhaps has retirement income coming. (So don't forget to save for retirement too!)
MarketWatch notes that one BIG mistake people make when it comes to insurance is buying it too late: "According to AccuQuote's Udell, the average life-insurance customer is a 48-year-old man with teenaged children — and he's about 15 years too late. As people get older, the more assets they typically have, which can offset the financial impact of death; a 30-year-old with a baby, on the other hand, has relatively little, and years of income ahead of him ... But the number of life insurance applications for people younger than 44 has dropped between 4% and 5% per year over the last three years. Meanwhile, the number of applications for people 60-plus has risen steadily over the same time frame."
And for those who love Term insurance, remember that it can become more expensive and harder to get as your health changes, so what was available when you bought a Term policy at 30 when you were young and healthy may not be available at 60 if you've had a bout of cancer. Some Term policies can be converted to permanent if you act by a certain point, but that will increase your costs, so pay attention to the fine print.
A health screening is common for almost all insurance, and things like smoking or pre-existing conditions will be considered, but today's companies might look at your driving record, credit score and even web-surfing habits to decide if you are worth the risk. Remember, the insurance company's goal is to bring in more premium dollars than the amount they ultimately pay in death benefit payments.
If you do buy insurance, it is VERY important that you keep that policy paid up and the contact for the policy with your other financial records so that your heirs know how to get the money. Consumer Reports found that about 1$ Billion in unclaimed life insurance benefits are waiting for the right people to claim them. You begin that process by getting a copy of your loved one's death certificate, an arrangement you make with the funeral home.
You can learn more about investments and insurance at Crown, and I urge you to get informed on what can be a rather complicated process. The Bible gives us clear instruction to make a financial plan for our families.
1 Timothy 5:8 notes, "Anyone who does not provide for their relatives, and especially for their own household, has denied the faith and is worse than an unbeliever."
But you don't have to do it alone. Get some help.
I have also included a link to a free document that provides steps that a surviving spouse should take when they lose a loved one. Anyone who loses a loved one will find it helpful.
Proverbs 15:22 says, "Plans fail for lack of counsel, but with many advisers they succeed."
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