Life insurance agents provide a valuable service by explaining policy benefits and costs, but they may not tell you everything you need to know before you make a coverage choice.
Agents are in the business to sell policies, so it’s to their advantage to focus on the positives. Consumers can protect themselves by doing some research so they’ll understand the basics of how life insurance works. It’s also important to ask questions about anything you don’t understand.
“Not everyone’s needs are the same,” explains Curtis Price, an independent insurance agent based in San Diego. “You need to ask questions.”
Here are five things that your life insurance agent may not tell you:
1. Not everyone needs life insurance.
While many people can benefit from life insurance protection, each situation is different. The main purpose of life coverage is to replace your income if you die, so your dependents will be provided for. If you’re a primary breadwinner with a spouse or children who rely on your income, buying a life insurance policy probably is a wise decision.
However, if you have no dependents, a life policy could be a waste of money, unless you plan to designate a favorite charity as your beneficiary.
Also, some people have enough financial resources to guarantee their dependents’ wellbeing, even if they die unexpectedly. “If you have enough savings or investments so that all of your primary expenses are covered, you may not need life insurance,” says Price.
Kevin Foley, an insurance agent in New Jersey, says for some people it makes sense to buy a minimal amount of life insurance to cover final expenses, such as funeral services and burials.
2. Permanent life insurance isn’t right for everyone.
The two basic types of life insurance policies are term and cash value, which also is known as permanent or whole life insurance. A term life insurance policy generally is less expensive, because it insures you for a fixed period, such as 10 years. At the end of the term, you must buy a new policy.
Cash-value insurance covers you for your entire life, as long as you pay your premiums. It gradually builds a value on a tax-deferred basis. The cash value is the amount available if you surrender a policy before you die or after the policy reaches maturity. Maturity typically occurs when the insured reaches age 100, says Foley.
A cash-value policy can be borrowed against for such expenses as down payments on homes and college tuition. The cash value is different, though, than the policy’s face amount — which is the money that will be paid upon your death, or when the policy matures.
Because cash-value policies are designed to keep for extended periods, they may not be right for people who don’t have a need for long-term coverage, according to Life Happens, a nonprofit organization formed to educate the public about life insurance issues.
3. You can buy too much life insurance.
It may sound like a good idea to buy more life insurance than you need, but taking on too much coverage will place an unnecessary strain on your bank account. MarketWatch points out that it’s a good idea to have enough coverage to pay off your mortgage. After that, the amount you select should be based on the needs of your dependents. Don’t be too quick to agree to $500,000 or $1 million in coverage.
If you’re widowed and your children are grown, your need for life insurance is likely to be much less than a primary breadwinner with a spouse and young children, says Jim Armitage, an insurance agent in Arcadia, Calif. “It all depends on what your goals are and what your needs are,” he says.
4. Your life insurance agent is paid on a commission basis.
Your agent may be sincere when he or she says you don’t have enough life insurance coverage, but remember that agents typically are paid on commission. The larger the policy you buy, the more money they earn. Sometimes agents will urge clients to replace existing policies just to generate new sales, says Foley.
“Be cautious if your agent sells you a policy and tells you a couple of years later they have a better deal,” he says.
If your agent says you need an expensive policy, make sure he or she can justify the cost, Foley adds. Don’t be afraid to ask about your agent’s commission on various insurance products.
5. Insurance is primarily a risk-management tool.
If you’re looking for a way to invest your money, there normally are more profitable ways to do so than buying a life insurance policy.
While permanent life insurance has an investment component, the main purpose of any life policy is to replace the income of the insured and to protect his or her dependents. A policy enables you to manage your risk of dying.
“I’m not an advocate for saying life insurance is a good investment,” says Foley. “It is a tool for providing a cash flow to your family after death.”
There are cases, however, when it makes sense for high net-worth individuals to minimize estate taxes by buying permanent life policies. Consult a qualified wealth planner to explore your options.
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