American Express called this week. They’re selling a life insurance policy. So here are a dozen Life Insurance Rules of Thumb.
1. For the Term of his natural life?, or Jargon Busters
Term Life Insurance is a straight-up insurance policy. You die (or some other defined incident) and the insurer pays money. Whole of Life Insurance has a savings component and surrender value. Commissions, fees and charges are higher on Whole of Life, plus it takes about 20 years for Whole of Life to offer a decent return.
What to do?
a) Buy term – invest the rest. Note that second phrase.
b) Build your asset base to provide sufficient income, until insurance is no longer required.
2. Never buy insurance from telemarketers, or On sweatshops and boiler rooms.
How much money would it take to make you ring people at home in the evenings to sell stuff? They can’t pay me enough.
Nella used to sell trade magazine advertising over the phone. Nella gave great phone for great commissions. Telemarketing is an expensive business and your premiums pay for it.
3. Cheap and “easy”, “no medical” insurance isn’t, or What free lunch?
Online, I compared three Term policies from two insurers monthly premiums.
| Insured Amount | Monthly Premium Co. A | Monthly Premium Co. B |
|---|---|---|
| $100,000 | $15.07 | $12.30 |
| $200,000 | $22.65 | $24.60 |
| $300,000 | $27.28 | $35.98 |
Most brokers can get an average person $500,000 coverage for the $300.000 premium.
4. Don’t smoke, or Can you say Yule Brunner and Steve McQueen?
You know it kills you? Well, your insurance company knows it. Smoking will add about 75% to your premium. BTW, I know it’s “Yul Brynner” but you’d be surprised how many people search Google with the misspelling.
5. TPD? Better than ADHD
Total and Permanent Disability cover is expensive and full of “exclusions”. That’s insurance speak for reasons not to pay you. However it is nice to get paid as soon as something bad is diagnosed. So I have Term Life and a much smaller $100,000 TPD cover. Should a bad thing happen I get money for treatment and to put my affairs in order. Term cover will then pay out when the end comes.
6. Only insure income producing assets, or Do you want fries with that?
Brokers love to upsell. Your home-maker spouse allows you to work and you’d miss them on cold nights. Don’t insure them unless they make mortgage payments. Invest the premium instead.
7. Review your insurance at least every two years, or know when to fold ’em
Once your assets are feeding you, do you really need half a million in Term Life? Thinkaboudit!
8. Income Protection Insurance, or You don’t need it, till you need it
Can you afford 6 months unable to work? Would your investments eat you? Watch out for medical history excluding you on this.
9. Get Term Life before 34 but not too soon, or How old am I again?
Most people can qualify for Term Life before 34. Does a 23 year-old without obligations need it? No.
10. Start investing, or That means today, slacker!
Do something about it today. Insurance companies only write business for the cashflow to invest. There’s a lesson in that.
11. The most powerful force in the universe?, or Up, up and away
Compound interest. There’s an article in just this. You do know that at 10% p.a. you double your money every 7.2 years?
12. Add your own, or Whose life is this anyway?
I can’t tell you everything or you won’t learn. Get a piece of paper out and write a plan. Now. I’ll wait…
Then add a reply down there with the suggestion…
I’m waiting…
Really…
3 responses to “12 Life Insurance Rules of Thumb”
You’ve inspired me to write an article on Super. But in the meantime… it depends. Superannuation life policies are normally Term life allowing you to purchase insurance with pre-tax dollars.
Do you think super is a nest-egg or safety-net to grow and support you in retirement? If so then don’t waste up to 50% of your contributions on a non-competitive Term life insurance product.
Conversly, do you believe that super is a waste of effort, you can do better on your own and wish the government would stop telling you how to invest? Then you might as well use the forced savings for something useful like Term life. If you have to pay super you might as well get a benefit.
Term life insurance covers you for a term of one or more years. The insurer pays a death benefit only if you die in that term. It offers the largest insurance protection for you premium dollar. Term life does not build up a cash value. Often term life cover stops at 65.
Whole life insurance covers you as long as you live and your premiums are paid. They develop a cash value. You are buying an investment product. The premiums start significantly higher than Term life but after 15 years or so should get cheaper (especially as you get older).
You would be better off buying Term life and investing the Whole life premium in a growth fund. The trouble is most people are not good at the descipline required to invest the difference. They put it off for next month, then next year, then never.
As for getting it by 34 (for men, and before pregnancy for women)… Term life gets more expensive as you get older. Also most young singles don’t need to insure their lives until they have something to lose. Therefore insure once you have dependants and before premiums get too high.
So what is your take on the difference between the life insurance provided by a typical Super fund and the stuff you are talking about here ? Should people be looking beyond what is offered by your super fund ?
So how does Term Life work ? Why get it before the age of 34 ?
Good to get someone’s opinion on these things who is not an insurance sales person or broker !
There are many different types of insurance that fit into various lifestyles and life goals. Most of what you do in life and what you have, depends on your income. So what happens if you were to get sick or injured? The quality of your life would suffer, so make sure you back it up with income protection plans.