We’ll begin our disaster-of-the-week sessions with the most straightforward: life insurance. A few principles will guide us:
- The purpose of insurance is to protect against financial losses you cannot afford to suffer.
- Insurance policies generally make lousy investments. This is as it should be, since we want the insurer to be financially healthy and able to pay claims.
- Whenever possible, coverage should be clear, from a reliable provider, and noncancellable except for nonpayment of premiums.
- Where insurance is needed, cost considerations should be secondary and only used to break ties.
Okay, let’s start with (1). When you die, your cost of living drops dramatically. As a result, you don’t need life insurance at all if you’re the only consideration. So don’t forget that insurance is for those who would be placed in financial distress by your death. If you have no dependents or your family is financially independent, you don’t need life insurance. If you are married without children and your surviving spouse has an expectation of working, remarrying, or going back to live with parents in the event of your death, it probably makes more sense to save and invest the premiums to accelerate the date of your joint financial independence rather than pay premiums.
On the other hand, once you have dependent children, it most likely makes sense to have life insurance on BOTH of you. Even if only one of you is currently bringing in a monetary income, remember that the death of the other creates an enormous career burden for someone with children, restricting employment options, ease of travel, and other factors likely to affect promotions. I’ve recommended million-dollar policies on full-time homemakers that initially surprised the couple until they started to think about all the working spouse counts on in order to focus on a profitable career. Finding a full-time nanny and making sure young children receive the emotional support of the surviving parent are not easy issues. Again, though, think reasonably about the possibility of grandparents stepping in to overcome the worst of these problems.
Assuming the need for life insurance has been established, the next stop is one you probably saw coming: I believe that straightforward term life insurance is almost certainly the way to go. As step (2) emphasizes, insurance is typically a lousy investment, and combining pure protection against death with a relatively inflexible set of investment options is not a course I recommend. You’ve probably heard the phrase “buy term and invest the difference” from others, and I’m not about to give you a fresh take on this matter.
As for step (3), life insurance should simply pay because you’re dead, and not require that you died of cancer, or an accident, or whatever. I’m amazed at how many people fail to remember that your chance of dying of cancer is smaller than your chance of dying, and that conditional payments for death that depend on proving a certain cause can be problematic at the worst possible time. Get coverage for death, not just a specific type of death. And for the period you require coverage (perhaps as long as 20 years if you have newborn children and are nowhere near financial independence), you want the coverage to be noncancellable from a company you expect to be around. Most policies that are guaranteed for a specific period of time have level premiums, meaning you’re overpaying in the early years and underpaying in the later ones, which is not ideal in my mind, since your financial situation normally improves with time and makes it better to pay lower premiums now and higher ones later. But you need noncancellable coverage in case your health deteriorates, and you will have to choose from the options offered.
Assuming you are saving and investing regularly, your circumstances should lead to an eventual absence of need for coverage. Term life insurance demands that, so be aware that the low cost of term is based on the awareness that you are the one who will be responsible for saving and investing to protect against the far greater risk that you will NOT die in the next 20 years!
So long as you are choosing a straightforward noncancellable term life insurance policy for the period needed, you can shop for prices using an insurance broker or online service such as Insure.com. Needless to say, quotes often disappear once they find a health issue you consider trivial, such as higher than average cholesterol or a family history of a disease you don’t currently have, so be suspicious of the lowest quotes until you’ve actually been offered a policy. Very few people seem to qualify for the initial rate quoted.
You can, of course, start taking better care of yourself so that you look better during the examination (and reasonably priced insurance always requires an examination). I will refrain from giving you specific health advice based on my own biases. Well, okay, I won’t refrain:
- Stop smoking (that one’s easy).
- Cut down on sugar and flour in your diet.
- Fast for at least 16 hours once a week.
- Take Dr. Hoover’s Magic Health Formula Life Extension Medici … too much? Okay, I should have refrained.
Actually, although I would like you to take better care of yourself, I’m concerned about the person who delays getting necessary coverage until they’ve improved their health. First, procrastination being what it is, that may never happen. Second, procrastination being what it is, you might never get around to applying for the policy. Third, if your health isn’t perfect, protection may be even more critical for your dependents. Get the policy, improve your health, then apply for a replacement policy when you think you can get the premiums cut substantially. Or just enjoy your improved health.
Of course, I’ve left off the biggest issue in this discussion. How MUCH life insurance coverage do you need? I’m thinking, I’m thinking … I’m thinking …
I’m thinking I need another week to describe in straightforward language how to calculate the amount of coverage needed.