A couple of weeks ago I received a message from one of my readers that sent a chill down my spine.
DEAR MARY: I recently switched my life insurance policy from term to whole life. Now I am not sure I made the right choice. Which one is better? I am in my early 60s. — Aline
With so little to go on, I had to read between the lines and I came up with a few thoughts. This reader had a term life insurance policy, and someone — I am going to assume it was an insurance salesman — advised her to switch. I do not believe this was her idea.
I am convinced that she he had no idea what she was doing. Whoever advised her did not educate her so she could make her own informed decision, one that she would not doubt as soon as she'd written the check.
I responded privately to the reader, and have not heard back. In the meantime, I have compiled this list of things that everyone, regardless of age, needs to know about life insurance.
Number 1: All policies fall into one of two categories. Term insurance is pure life insurance coverage. If you die with this policy in place, it pays out the face value to your beneficiary. Whole life policies (there are dozens of variations) combine an investment product with pure term insurance, and this combination builds cash value.
Number 2: Insurance is sold, not bought. Insurance agents sell the vast majority of life insurance policies because the life insurance industry has a vested interest in pushing high-commission (and high-profit) whole life policies. There are no insurance stores to shop at. In my opinion, insurance agents walk a thin line because they wear two hats: teacher and salesperson. This creates a conflict of interest. The way to beat this is to never actually purchase insurance from the same person who advises you on the type of insurance you should have. Educate yourself first, and then contact an insurance company.
Number 3: Whole life insurance is expensive. Policies that include an investment component cost much more than term policies. As a result, many people who buy a whole life policy often can't afford an adequate face value, leaving them underinsured.
Number 4: Whole life policies are built on assumptions. The returns quoted by the agent are guesses, not reality. Most companies guess on the high side to attract more buyers.
Number 5: Keep your investments and insurance completely separate. There are better places to invest that don't come with the very high commissions of whole life policies.
Number 6: Buy enough term coverage to fulfill your needs. Life insurance is no place to skimp, especially with rates at historic lows. A good rule of thumb is a policy that's 8 to 10 times the gross annual income of the primary breadwinner in the family, and 5 to 8 times the secondary earner's gross income.
Number 7: Match the terms of the policy to your needs. You want the policy to last as long as it takes for your dependents to leave the nest or for your retirement income to kick in.
Number 8: Buy when you're healthy. Older people and those not in the best of health pay much higher rates for life insurance. Buy as early as you can, but don't buy until you have dependents — these are people who would become financially destitute without the support from your income.
Number 9: Tell the truth. There's no sense in exaggerating facts on your application to get a lower rate. Insurance companies always investigate before paying. You will not get away with fudging the facts.
Number 10: Shop online. Buying life insurance has never been easier, thanks to the Internet. Once you know the type of insurance you want and the amount you need, you can get tons of quotes online and avoid pushy salespeople. Just know exactly what you want and how much you need before you ask for quotes. Then stick to your guns.
Mary invites questions, comments and tips at [email protected], or c/o Everyday Cheapskate, 12340 Seal Beach Blvd., Suite B-416, Seal Beach, CA 90740. This column will answer questions of general interest, but letters cannot be answered individually. Mary Hunt is the founder of www.DebtProofLiving.com, a personal finance member website and the author of "Debt-Proof Living," released in 2014. To find out more about Mary and read her past columns, please visit the Creators Syndicate Web page at www.creators.com.