When meeting prospective clients, I’m often asked about the
difference between term and permanent insurance. Of course, most people simply think that perm
is more expensive than term, and that’s the whole story.
A nice introduction to insurance can be found on the LIFE
Foundation website. This is a non-profit
dedication to educating consumers about life and other forms of insurance.
While you can find lots of articles on the internet about
the merits of term versus perm, very few articles I’ve seen actually consider
these other important items:
1.
How much do you really need?
Most people I’ve dealt with tend to underestimate – probably
because of optimism and probably because of cost. They figure, heck, the spouse can go back to
work. But they forget to account for the
cost of day care. Or the fact that on 1
income, now the ability to save for college is basically gone.
And have you tried to find a job in this economy???
I always encourage everyone to estimate need a little high. Consider this example: If you want to buy something that costs $10
and you $11 in your pocket, you can buy the item and it’s not a big deal.
But if you lose a few dollars, and now only have $9 and
can’t buy the thing you wanted, now it’s a big deal.
Or in the example with auto insurance – no one ever said
that they wished their insurance only covered part of their accident repair instead
of covering the entire amount.
A little extra coverage doesn’t hurt. But too little coverage can be really
painful.
2.
How long do you really need the
policy?
Here again – probably for the same 2 reasons – people tend
to underestimate. One of the most common
scenarios is that most people want to have their life insurance pay off their
mortgage in the event of death.
The thinking goes – I have a 30 year mortgage, so I’ll
get a 30 year term policy. The coverage
will last as long as the loan. Great!
Well, the average mortgage only last about 7 years. People refinance to build an addition, or to
consolidate debt, or pay for whatever large purchase comes up. Or simply to lower the payment.
So now, the mortgage is back to 30 years. But the insurance is down to 23 years. And chances are, the homeowner will refinance
again in the future. That insurance need
has become permanent!
Think about it – how many people do you know who have
actually paid off a 30 year mortgage?
Regardless of what you want to cover, often what people
think is a temporary need is really a permanent need.
3.
How healthy are you really?
Health obviously plays a big role in the cost of
insurance. Every insurance company looks
at health slightly differently. Some
prefer only very healthy people. Others
will insure people with medical conditions.
Just like banks. Banks vary in
the type of loans they will approve.
However, if you apply to a bank for a loan and are turned
down, you can simply apply to another bank.
Not so with life insurance.
Once you’ve been turned down, it becomes extremely difficult to
obtain insurance.
After helping a client determine the proper amount, the
client went ahead and applied for insurance on her own. Well, while she was quite healthy at the
time, she forgot about a medical condition she had years ago, and it actually
caused her to be denied.
And now this mom to a 6 year old daughter can’t protect her
family.
Or if she really wanted coverage, she could probably get
something, but at a very high cost.
So what does this all mean?
Well, life insurance can be quite complex and as a result,
there can be a lot of pitfalls. It’s not
as simple as going online and buying a policy.
And it certainly goes beyond a simple term versus perm comparison.
If you’re serious about protecting your family, then take
the time to work with an expert who can help make the process very simple.
Your family’s well being depends on it!
September is Life Insurance Awareness Month. How are you protecting your family?
Take part in my poll about life insurance on LinkedIn. The link is here.
