Do You Need Life Insurance?

I recently read a discussion forum about life insurance. In this forum, there were some incredibly intelligent people that ranged from financial advisors, fee for service advisors, life insurance agents and even do-it-yourselfers.

Life insurance has forever been a controversial topic of discussion. The roots of negativity stem from the stereotype of the plaid suit salesman, who goes from door to door pitching the merits of life insurance. Traditionally, it was more about making the sale than incorporating life insurance into a complete financial plan.

While some of these 'salespersons' still may exist, they may not be as transparent. The life insurance agent today, can often hide behind the financial planner title or a financial planning designation.

Critics of life insurance also question the commissions that these agents make. In many cases, life insurance can pay exorbitant commissions and bonuses. To be fair, there are some life insurance products that pay more commissions than others. No matter how you look at it, life insurance is an important part of the overall financial plan and simply one of the financial tools in the toolbox. The hope is that there are many good life insurance agents in addition to the bad ones.

Good life insurance agents are typically professionals who incorporate total financial planning.

How do you find a good life insurance agent?

According to my partner Jim Steeden, who has been in the life insurance industry for 26 years, there are some key things to consider. "The first thing you want to know is how long they have been in the business. While years of experience does not guarantee success, remember that 75% of life insurance agents do not make it past 12 months in the business. Next, you should know if your life insurance agent can provide a range of products from a range of companies. No single company has the corner on the best products all the time, so it is important to shop around or find someone that can do it for you. Finally, watch for the CLU designation (Chartered Life Underwriter). This designation signifies a financial planner with advanced knowledge in life and health insurance."

Start with the basics

The biggest problem with life insurance is that it involves emotion in the decision making process. Yet, good financial decisions are founded on logical processes and good research.

Start with the golden rule of life insurance "Only buy insurance if you need it." There may be many reasons why you might need life insurance. The reasons may not be completely logical. Life insurance is what I term the unselfish benefit. Those that purchase life insurance may not be the ones that reap the true rewards of the product.

Some of the reasons you might buy life insurance are to pay off debts, replace income, cover funeral expenses, provide a legacy, donate assets to a charity, or cover a final tax bill on the estate. The most obvious need comes if you have dependents that rely on your current income.

Buy term, invest the difference

Just like in investing, rules of thumb work many times but they do not work all the time. While I do believe that buying low cost term insurance is a very smart strategy, it may not apply to everyone all the time.

It all depends on Needs, Wants, Goals and Means. From there it is possible for me to determine what kind of Insurance they should buy. Life Insurance is not a "One-Size-Fits-All" solution. To many people make general assumptions and apply rules of thumb out of those assumptions.

As a financial advisor, I see many clients each month and I treat them all as individuals, which is how I like to be treated when I make a purchase.

The bottom line

Just like any purchase, there will be many issues that will impact the final decisions. I feel it is more important to get the right amount of insurance before you get into the discussion of what type of life insurance.

Next week, we will talk a little bit about the different types of life insurance.