Nobody wants “buyer’s remorse” when it comes to something as important as life insurance, yet we hear it all the time… policy owners who wish they knew what they know now before they bought their policy!
Today we’ll give you some things to consider early in the process.
How do you choose the right life insurance company?
Many companies have extremely similar products that are priced and perform similarly, so there may be many “right companies” that will work well for you. What is more important is to first choose the right TYPE of insurance and the right KIND of life insurance company, and the right advisor that can help you choose.
Some questions to ask:
Is the company a mutual or stock company? We work with mutual companies because mutual companies work for the best interests of their policyholders, who collectively own the company. Participating mutual life insurance companies are legally obligated to pay out their profits to policyholders in the form of dividends. While not guaranteed, most mutual companies have paid profits in the form of dividends without interruption for decades.
Stock companies have policyholders who are their customers, but their objective is to make a profit for their stockholders. Your best interest as a policyholder is not necessarily their top priority.
Does the company have a long, solid history? When it comes to life insurance, we believe that longevity is important! We recommend obtaining insurance with companies who have been in business for well over 100 years.
Is the company well-rated? You want to only purchase insurance with companies rated “A” or better (such as AA, A++) by the rating agencies (Moody’s, A.M. Best, Fitch and Standard & Poor’s). We find that established mutual life insurance companies tend to have excellent credit ratings, so there are many good options.
Is your death benefit guaranteed for life—regardless of how long you live?
Of course, this question refers to permanent life insurance, not term. Term life insurance is not guaranteed for life, only for a specific term. Of course, there is often a place in most people’s personal economy for term insurance, too.
When you desire permanent life insurance, watch out for death benefits that are only guaranteed with a special additional rider (and can be invalidated perhaps by a late premium payment) or guaranteed only “to age 100,” an age which more and more people are reaching!
Another related question to ask is, “Does the policy endow?” This means that when you reach a certain age if you are still alive, the policy benefit will automatically be paid to you because the cash value will equal the death benefit. (This used to be 100 and is typically 121 with new policies, a good age to shoot for!) If a policy endows, you also know it is a policy that is designed to grow substantial cash value.
Do policy loans or changes in premium payments jeopardize the guaranteed death benefit?
Be sure to “read the fine print,” because changes such as these can actually nullify a guaranteed death benefit with some types of policies! Also, note if there is a minimum premium amount to keep the policy guarantees in place.
Are the premiums guaranteed not to change?
“Flexible premiums” became a catch-phrase that sold a lot of universal life in the 1980s and 1990s, and by the 2000s, it became painfully obvious that these types of policies not only gave policyholders the flexibility to change premiums but the COMPANY as well. That’s because Universal Life (UL) and Indexed Universal Life (IUL) policies typically have changeable costs, such as rising mortality costs as the insured ages. The life insurance portion of the policy starts to climb dramatically as a person ages, and these costs can eat away at cash value, require higher premiums, or cause a policy to implode.
We think a much better solution is to have guaranteed premiums with the option for flexible payments. Whether you’re paying premiums for 10 years, 20 years, until age 65, or the rest of your life, you want the type of policy in which your premiums can never rise. Then if you need to pause or reduce payments for a time being, there is a surprising amount of flexibility with a whole life policy.
Can you use your policy to store cash for as long as you wish?
On the other hand, you don’t want to be forced into stopping premiums before you’re ready! If life insurance cash value is your primary tool for saving money and storing cash, you’ll want an option to continue premium payments as long as you want.
That may sound odd, because with most types of insurance (car, home, health), “premium payments” are usually an expense and not something you would want. Whole life policies work differently. As long as a policy remains in force, every premium dollar (plus additional growth or benefit) comes back to you and/or your beneficiaries.
Are policy guarantees based upon a guaranteed rate or a guaranteed dollar amount?
We’re taught to think of everything in terms of ROI. But would you rather have fewer dollars earning a potentially higher rate of return, or more dollars growing for you steadily—guaranteed? This is one of the issues with Universal Life; it is sold as an affordable option that will earn sky-high returns and turn modest premiums into a fortune. Even if the cash value DOES earn the promised return, there often just aren’t enough dollars earning those returns to matter.
Over a 30 year time period, you’re much better off having $1000 growing at 4% than $100 growing at 8%. By guaranteeing a minimum dollar amount, companies that provide whole life insurance are guaranteeing a minimum net return that is locked in. By guaranteeing a minimum net return, the company must also keep costs under control. (This is critical, as rising costs have been known to compromise Universal Life policies.) Dividends, which are historically reliable, though not guaranteed, increase returns further.
Are cash value returns tied to the stock market or non-correlated?
We believe that permanent life insurance should be your long-term protection and savings vehicle—the safe, steady, guaranteed part of your personal economy that provides a stable foundation.
If you are looking at a policy that is somehow linked to the returns of the stock market, you need to ask yourself if you really want your savings plan/life insurance to be compromised if the market is losing money.
Do you have the right help?
Can your advisor do the following?
- see the “big picture” of your finances to ensure that your life insurance makes sense in the broader view of your personal economy
- have the capability of working with multiple life insurance companies
- assist you with illustrations, guidance, questions, and paperwork
- advise you from a Fiduciary standard, and
- help you understand your choices and the potential financial impact they may have.
Life insurance doesn’t need to be confusing. We are here to help you through the process! Give us a call at 574-234-1980 or visit our website at NeeserInsurance.com.
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