In 1985, when I first started in the life insurance industry, we didn't really ask "what kind of life insurance should I buy?" because we didn't have the choices we have now.
There was only one type of term insurance policy available- ART, or "Annually Renewable Term" insurance. Of course we had whole life insurance and the new "Universal Life" insurance, but those policies were typically more expensive and used for different purposes than buying the most affordable life insurance to provide maximum value for families.
ART policies featured premiums that started out low and increased each year at renewal time. Imagine a 45 degree angle where the left hand axis is the premium payment and the right hand axis is time and you'll understand that ART policies become unsustainable pretty quickly. These policies were used as an entryway to longer term products, most notably whole life insurance, which features high premiums, but builds cash value over a period of time. You could, however, switch into one of these whole life policies without proving good health, a feature called a "conversion option".
The conversion privilege for a term insurance policy means that you can make the switch to a permanent life insurance policy without proof of good health. Chris Huntley, a colleague of mine, has put together a really nice resource for you to read about term insurance conversion and why it's important to make sure your policy has this feature. One other major resource Chris has is a definitive guide to how brokers select the best life insurance carriers for their clients. I actually use this resource of I have any questions about a good fit for a specific carrier/client.
In the 1990’s insurance companies began to understand that it would be wise to create term insurance policies that didn't require increased premiums each and every year. I remember the first level premium term policy I saw was a three year level premium term insurance policy and that seemed SO revolutionary! It made sense that policyholders would want to keep term insurance instead of expensive whole life insurance, especially here in Palo Alto or the Bay Area, where housing prices and incomes were rising very quickly and folks realized that they needed larger and larger amounts of term insurance to replace the income of the main breadwinner or to pay off a large mortgage at death.
So, after the history lesson, you're asking, "ok, so what kind of life insurance should I buy"? Well, since you've probably searched for life insurance in Palo Alto, or maybe life insurance broker in Palo Alto, or any other Google search terms, then it's fair to say you probably live in the Bay Area, or California. If that's the case, then I firmly believe that you should buy the most cost-effective term life insurance possible to protect your standard of living for your family. With the California economy seeing massive price increases, a cheap term life policy is the only way to go...Especially since term insurance costs less than a new cell phone these days!
Don't wait! Get started now!
I see this all the time- a young couple with little kids calls me because they are shopping for life insurance online and they find my site. They run some numbers for, perhaps, $300,000 of 10 year term insurance which results in a very low premium. We start the conversation with the usual pleasantries and then I ask them what caused them to think that they need a life insurance policy. The answer, usually, is that they recently had a child, and that they were about to close on a house somewhere on the SF Peninsula where the median home price is over $1Million.
The next part of the conversation consists of me asking about how they arrived at the $300,000 figure. "Well, it sounds like a round number and it's 1x my salary and should be enough to give my spouse 'time to adjust' to life without me", he answers. "OK, so how much will your new mortgage be?", I ask. The response is $900,000 with $300,000 down on the home, plus another $250,000 for remodeling expenses. This couple recently went through a "liquidity event" and has plenty of cash.
That's just the house. The more we talk, the more they start to realize that the initial amount of death benefit they were playing around with on the life insurance quote engine on my site was way too low to make any sense in their overall financial plan. On top of home expense, this couple needed to consider significant daycare expense and continued income for the stay-at-home spouse. Of course they had some dollars in the bank, but nowhere near the capital required to fulfill their needs for basics and continued lifestyle.
In addition to the financial side of this picture, they also needed to consider their future insurability and the fact that health often changes over time. In fact, here in Silicon Valley, many folks tend to burn the candle at both ends at work and that makes for a very stressful situation. Stress causes all sorts of health problem, from weight gain to high blood pressure, to diabetes. I've seen this happen to me personally as well as numerous clients. That's why I stress the importance of making sure the amount of insurance is enough to last a long time and can be somewhat flexible if/when financial circumstances warrant changes to policies and benefit amounts. In my practice we use "term insurance ladders" and build blocks of policies which can be cancelled on a planned basis. We do also use certain types of permanent insurance products if they are called for. Those would be for someone who currently owns a term insurance policy and undergoes some sort of chronic health condition that would preclude him or her from being able to qualify for a new term life policy. We would lock in the premium rate with the permanent policy and, at least, the client would be able to plan around a stable long-term premium.
This last point brings me to a story I found from a life insurance blog in the Philippines. This gentlemen underwent something similar and passes on some excellent advice to consider when an insurance agent "chases" a young potential client who is reticent about buying life insurance too early in his career. As you'll see, it's the kind of advice I would want someone to give me if I were in the younger person's shoes. Whatever you do, if you know folks like I've described above, please do them a favor and plant the seed in their minds about thinking bigger than a "convenient" amount of life insurance. They'll thank you for it!
Here's the article by Efren Ll. Cruz
For some reason, I can hear Richard Harris playing his favorite character of an old leader full of wisdom and experience, whether as Albus Dumbledore in the earlier Harry Potter movies or as Marcus Aurelius in Gladiator, and reacting to the above script with the line, “Ah, the folly of youth!”
I was once, and still prefer to think of myself as a yuppie. Alas, my age shows for even the use of the word yuppie is not in vogue anymore. Nevertheless, it is said that experience is the best teacher. So let me relate my experience as far as life insurance goes.
I believed I was superman in my late 20s and early 30s. I had a promising career with an attractive pay. I had lots of plans, all of them grand. So why would I need to get life insurance? The first life insurance I got was sold to me by the unit head of the aunt of a girlfriend who I didn’t end up marrying. As soon as my girlfriend and I broke up, I discontinued the life insurance policy.
The next insurance policy I bought was from a guy who belonged to the same religious group I was a member of. Because of his persistence, I reluctantly bought up to P1.5 million in life insurance coverage from him.
Do you see the pattern? I was buying life insurance only because it was being sold by friends and not because I saw it as something I genuinely needed. And then it happened. While undergoing an ultrasound for a suspected kidney stone, I was diagnosed as having the potentially life-threatening polycystic kidney disease or PKD. While my father had it, I was made to believe by my relatives that PKD would skip a generation. I was frantic to say the least. There’s nothing like the prospect of a shortened life to jolt you into action. I searched the Internet for organizations that supported research on PKD. I found one with a banner in its home page saying, “Don’t worry, you are not alone.” I checked the visitor count and found that I was visitor number 3. I visited the next day and found that I was visitor number 4. Well, so much for not being alone.
What was worse was I began to worry about my family. Questions like “When I’m gone, would they even have enough to eat?” and “Will my children still be able to go to school?” haunted me. And I had every reason to worry because my father died at the age of 44, leaving behind a 39-year-old wife and three children.
I looked at my life insurance policy and quickly determined that P1.5 million would not last long for my family. Unfortunately, I could not be insured for any additional coverage anymore. Whereas before I was being chased by insurance agents, now I was chasing them. One insurance company after another would deny me coverage. They would not even give me coverage at a higher premium or what they called “rated.” It was too late for me.
None of us know when our appointed time to leave this world is. We may live long or not. We may depart via a sickness, accident or through the normal aging process. But unless we are born into wealth, the typical path is that we have lesser savings and more expenses when we are younger. Only when we get older will we have more savings and lesser expenses. The problem occurs when we are called from this life early? What happens to those we leave behind? You may not have your own family yet, but what of your siblings and even parents?
Life insurance is a must. Don’t run away or hide from the insurance agent. He or she is persistent and seemingly pesky only because people have yet to realize the real need for life insurance. It is funny that we tend to insure our properties first before our life or what I can insuring bahay before buhay. But isn’t it true that it is the productive capacity of our life that gives birth to all of our properties?
So next time an insurance agent comes knocking, welcome him or her. He or she will be carrying the protection you will need against the risk an untimely demise. Buy early in your career as it is not only the time when you need it most but also the time when premiums are cheaper.
Stay safe and protected.