Herb Denenberg Column week of December 01, 1998


In my last column, I told you why term insurance rather than whole life insurance is the best bet for most people, and how to do some shopping for the lowest premiums. Here is more advice on buying life insurance.


(1). Make sure you need life insurance in the first place. You may not need it at all. The classic case is a single person with no dependents. Another classic case is a retired senior citizen without any earned income. He would not need life insurance, in the absence of some special estate planning reason for doing so. Still another case is a breadwinner who has enough group insurance from his employer. And a final case is a breadwinner who has enough savings to make life insurance unnecessary.


Don't blindly accept an agent's advice that you need insurance. Some agents have never talked to anyone who did not need more insurance. Too many life insurance agents are expert at selling the wrong kind and wrong amount of insurance to people who don't need it at all. In fact, major segments of the industry specialize in selling life insurance for people who don't need it, such as children.


(2). Figure out how much life insurance you actually need. You can get a rough idea of the answer by tabulating your survivors' need for income and subtracting the resources now available.


For example, you have to calculate your annual living expenses (budget) for each year. This figure may change as children leave home, and as housing needs change. It can be calculated for each year through the life expectancy of a surviving dependent spouse. Consumer Reports suggests that should be age 90.


Then you have to calculate other special needs, such as an education fund, and a contingency fund, to meet emergency and other unforeseen events. The needs figure is totaled up. Then your resources available to meet those needs must be ascertained. They include such items as investments, other savings, pensions, existing life insurance, and social security. You subtract the total resources from the total needs to determine the amount of insurance needed.


That has to be tempered by what you can afford. In most cases, you're more likely to be able to afford what you need by buying term rather than whole life. At younger ages, term insurance can provide remarkable amounts of protection. For example, according to Consumer Reports, a thirty year old can buy $500,000 of ten-year term for an annual premium of $210 from New Republic.


(3). If you do go for term, which makes sense for most people, remember that there are many different kinds of term insurance. In the past, many experts have recommended annual renewable term (ART) as the most economical way to go. But Consumer Reports (CR) says you'll probably find level premium term (say for 20 years) to be a better deal. CR also recommends getting term with premiums guaranteed not to increase during the term. You should also get term that is convertible into whole life.


You may want to compare both level premium term and ART.


(4). Do some comparison shopping, and don't be rushed into a fast decision. Be on guard as many life insurance agents are expert at forcing a quick decision. They are smart enough to know if you think about it long enough, you may start understanding it, and perhaps rejecting their proposals and seeking better options.


This rule applies to all transactions: beware of those who say some deal will soon disappear; when they do, let them disappear.


(5). Make sure any company you consider has high ratings in the recognized and reputable financial rating services. Depending how cautious and conservative you want to be, you can decide how many ratings below the top rating is acceptable.


Smart buyers insist on companies with the high ratings. There are five widely used systems. One of the oldest is Best's, whose highest rating is A++ and whose next-the-highest is A+. It has a rating system that includes fifteen categories. Another service, Standard & Poor's, has 19 different rate categories. The top is AAA followed by AA+.


One rule of thumb suggested by the Insurance Forum, an widely followed newsletter, is to insist on high ratings from at least two of the four rating services which it follows. It has various definitions of high ratings that vary from one service to another. For example, for the most conservative buyers, high ratings includes the first two rating of Standard & Poor's.


Ask the company or agent for the financial rating of the insurer and what it means. Many libraries have books or other publications with ratings of insurers.


(6). Don't drop an existing policy in order to buy a new one, without talking to the company and agent that wrote the policy, and without getting proof, in writing, that it is advantageous to do so. There are many reasons why you have to be cautious in replacing policies, so don't move ahead on a policy replacement unless you are sure you know what you are doing. One of the major ripoffs of the life insurance industry is getting people to drop old insurance to get at its cash value in order to buy a new policy. The new policy carries a fat commissioner (55 percent of the first-year premium on many whole life policies); sometimes no commission at all is paid on an old policy. Given this incentive, the stage is set for replacements that enrich the agent and defraud the policyholder.


Some replacements make sense, but don't go for one that you don't understand.


(7). Save all brochures, illustrations and documents used to make the life insurance sale. They should be maintained on file, in case you have to raise questions about the transaction later.


(8). Get your questions answered before buying. But take full advantage of the 10-day free-look provision commonly used. It gives you a ten-day period to examine the policy and return it for a full refund if you decide you don't want it.


(9). Don't assume that life insurance should be your first priority when buying coverage. The coverage most likely to be neglected is disability. Don't forget that disability, being unable to work and possibly generating huge medical expenses, can be more financially devastating than death. So don't commit so much to life insurance that you can't afford disability.


(10). After you do purchase life insurance, don't forget about it. You should periodically reevaluate your coverage. Certainly anytime you have a change in marital status, family size, employment or other key life events you may want to evaluate your coverage. 


(Herb Denenberg is a former Pennsylvania Insurance Commissioner and consumer advocate.)

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