While your art may be about freedom and creative expression, our lives are full of responsibilities and commitments. That’s what makes life insurance so important: if we can’t fulfill our responsibilities, do we want to leave a pile of unpaid bills and unfinished goals to our heirs?
I was making this argument to a friend recently, who replied, “What do I care, I’m dead!”
While that’s true, is that the legacy you want to leave? I like to think most of us hope for more.
Choosing insurance isn’t easy, but it also isn’t simply “an art.” There is some science we can apply to life insurance decisions to find out whether we should purchase some or not, and then—if we should purchase insurance—determine just how much we need to buy.
Miata’s 5 Steps to Good Life Insurance Decisions
1) List what you’d like to have happen when you pass away.
- Are there bills that need to be paid?
- Are there survivors you’d like to care for, such as children?
- Is there a specific bequest to a charity or artistic group that you’d like to make?
2) Add together what these bequests will cost.
- Amount of your debt
- Total needed to support others
- Sum you’d like to leave for charities or groups
Finding the sum of your debts will be easy. Deciding how much you’ll need for survivors is a little harder, but still can be done. How? Use calculators on sites such as Yahoo! Finance to figure out how big a barrel of money you’d need today to accomplish whatever goals you might still need to fund (college for children or retirement for a spouse are two goals I often hear).
3) Compare the amount of money you have with your need.
If you have enough money in assets, you don’t need life insurance at all to meet these challenges! If you have a shortage, then life insurance is the most cost effective way to meet these challenges.
4) Decide which type of life insurance is best for your goal.
This is the hardest step.
Finding the right insurance isn’t difficult because there are many types, but because there are so many biased people in the market pla
ce. Some marketers only sell certain types of insurance (or they receive a much bigger commission to only sell one type) so they focus on this arena, calling all others bad. On the other side, there’s an equally vocal response from advocates who automatically see the insurance salesman’s profit motive as “bad” and without analysis immediately point to “best” as the most inexpensive type today (regardless of overall cost down the road).
While I won’t be able to thoroughly cover all the types, let’s give you a good head-start on the process:
Term insurance is best for short-term needs. The cost of term is based on your current age, so the cost rises as you grow older. If you think you’re going to need it past age 65, term insurance rates skyrocket quickly. Buy term if you’re sure not to need insurance after you’re 65.
Whole life coverage takes away the threat of insurance running out before you do. However, because the internal policy costs are also high on older people for this type of insurance, you’re going to pay through the nose while you’re young to subsidize a low cost when you’re older (think of it as prepaying). While whole life insurance has a savings component, don’t be fooled into thinking of this as a savings account: the rates of return on these policies can easily be beaten by outside investments over time.
Universal life insurance uses internal term insurance costs while allowing you to vary the amount of money you contribute to the policy. Here’s what you pay: the term cost of insurance plus extra to make sure you don’t have to pay as much later. You can also lower the insurance death benefit over time, which can reduce the overall cost of the policy. This type is more cost effective than whole life but because it’s guaranteed to last until you die, is still significantly more expensive than term insurance. Universal policies lapse far more often than whole life policies because the owners usually don’t understand the complex relationship between funding the policy and increasing rates of insurance cost inside the plan.
Miata’s quick low down: If you need insurance for a short time that ends before you’re 65, choose term. If you need longer term covera
ge, decide how important guaranteed coverage is to you. If you don’t mind flexibility and a little complexity, research universal life policies. If you want so
mething guaranteed to last forever and don’t mind paying for it, whole life is for you.
5) Research only the type of insurance you need. Why do you want to be confused researching three different types of insurance when you only need one? Use online shopping tools to make the process of comparing several different insurance companies easier. Here are a few things to watch out for when shopping:
- Don’t just compare prices. Sometimes a clever agent can make a policy less expensive by removing what are called “riders” on a policy. These “riders” are additional coverages. Compare apples to apples before looking at the price tag.
- Check out the insurance company. Ask about the company’s rating. You don’t buy insurance to pay less….you buy it to be there when you need it, right
- Ask about discounts. Some companies offer discounted policies if you’re super healthy, live an active lifestyle, or for other considerations.
Choosing insurance can be an unnerving task if you’re talking to an insurance agent. Instead of focusing on whatever product a salesman is offering, use this five step process to decide which type is best for you AND THEN involve agents, if necessary. You’re more likely to enjoy the experience and come out of it with the right type of coverage.