No one likes to think about it much, but a good policy can mean all the difference for surviving relatives. Here's what you should consider
Other than insurance salesmen, no one likes to talk about life insurance. After all, no one wants to be reminded about their looming death. However, it's hard not to suspect that keeping this subject taboo is more in the interest of insurance companies than consumers. Better informed buyers are more likely to spend wisely. And like dentistry, life insurance can't be ignored forever.
Five for the Money usually advises readers on how to spend or invest wisely. This week, we're twisting it slightly to look at some of the biggest mistakes people make after inhaling deeply and deciding that as adults, they should probably pick up some life insurance.
1. Don't buy the wrong amount
There are rules of thumb about exactly how much life insurance one needs, with 5 to 10 times an annual salary being a common guideline. But these numbers should be taken for what they are: very general numbers. They don't account for an individual's requirements (see BusinessWeek.com, 2/21/05, "Scared to Death of Life Insurance"). "The need that we're often talking about is an income replacement," says David Greene, of financial planning firm Cooper, Jones & McLeland, so that survivors don't encounter financial havoc in the wake of a loved one's death.
Starting from the conventional wisdom, Greene says policy holders with a good pension might be able to get by with less than the standard amount. A more common problem is not buying enough—this is even truer in cases where small children are involved. Greene and other experts caution that lump-sum payments that look substantial on paper often don't add up to much compared with a consistent salary spread over many years. Then again, it's hard to imagine too many complaints about receiving too much insurance money.
2. Don't trust just any insurance agent—shop around
The life insurance options available are dizzying. Charles Massimo, president of CJM Fiscal Management, which works with wealthy clients in Garden City, N.Y., advises against limiting yourself to insurance advisers who are "captive" to one company. This is doubly true for people worried about their health. Insurers calculate risk factors independently of each other, so they won't all give health conditions such as heart disease the same consideration in evaluating an application. "Some [companies] are more aggressive with different risk factors," Greene says. A good place to compare offers from different insurers is Insure.com.
Weighing your options doesn't end with the purchase of a policy. "The standard is, people buy insurance and they put the deposit in the safe-deposit box and never look at it again," Greene says. That's a mistake. The fact is people's circumstances change, and so do the offerings from insurance companies. The policy that best fit your circumstances five years ago might not always be the right choice.
3. Don't be cagey
Most people would rather not talk about their life insurance, what with its intimations of mortality and the implication—still considered tacky in some circles—that a dollar amount can be placed on human life. But if holders don't talk about their policies with the beneficiaries, letting them know what company holds the policy, if not the amount, something worse can happen: Human life becomes worth no dollar amount at all.
Sometimes survivors simply don't know about the deceased's policies, says Steven Weisbart, an economist with the Insurance Information Institute. "It happens much more than it should," he says.
Corporate consolidation can also complicate matters. A policy bought 40 years ago could have been through an outfit that has since been assimilated by an insurance giant. Insurance companies, Weisbart says, like to pay out on policies as it makes for good public relations. Even so, it "becomes very hard to make a claim unless you've got good documentation," he adds. Not knowing where to begin can't help.
4. Don't forget, the world goes on
One of the hardest things for life insurance policy holders to realize is that they'll no longer be around when the insurance pays out. The purpose of it is to protect their immediate family or beneficiaries.
Weisbart says insufficient foresight can hurt relatives. For example: Say a policy holder's spouse receives health insurance from the policy holder's employer. In planning how much a life insurance policy pays, then, the primary caregiver should account for the spouse no longer receiving health insurance. In a slightly less dramatic example, buyers should remain aware that the cost of big expenses like college will continue to increase after they pass away.
5. Don't depend on employer insurance
When asked about life insurance, it can be easy to choose a policy provided by an employer with the premium deducted from a paycheck. But those policies can often provide a false sense of security. Among their other problems, they sometimes expire at retirement, when buying a more comprehensive policy could be more costly.
Worse, group life insurance is less tailored to an individual's health and needs. And often, the policy isn't worth enough money, Weisbart says. "Most group life coverage [plans] are really pretty modest, one or two times salary," he says. "In relation to what [beneficiaries] need, it's not a lot of money." In the end, buying the wrong policy can leave your family shortchanged.