Friday, November 09, 2007

Life Insurance

Unlike health insurance or auto insurance nobody ever wants to use life insurance. With family comes financial responsibility from that may exceed one's lifetime. Questions such as how much coverage is enough, what type of policy should be sought and whom the policy should be purchased through all get asked.

I have heard of a child described as a $400,000 mortgage. While one can argue with the figure, the order of magnitude is pretty close. If you have this kind of money sitting around, you don't need life insurance. If you don't, then you will want to consider the financial burden of your children on a surviving spouse or guardian after your passing.

Everybody would like to outlive their policies. This is what makes whole life and return of premium policies so enticing. It is a savings tool (albeit at a typically low interest rate) rather than money down the drain. Term policies are significantly cheaper and do provide a safety net at the time when its most important, when an unexpected death would have the greatest impact. The decision here is based on cash flow. If you have the money and your portfolio includes high yield products a whole life policy or return of premium policy is very reasonable.

Is life insurance a commodity? This is the question I am struggling to answer as I have applied for the same coverage through 3 different companies, with the quotes coming back at X, 1.5X and 1.7X In the world of contracts a 10% difference is cause for alarm.

The first obvious question is the financial strength of the company, will they be around in 20 or 30 years. Moody's and S&P rate companies and a B+ rating is adequate.

What about customer service? I feel safer with my agent down the street than I do with my insurance broker tapping away on a keyboard somewhere.

Are there any gotcha's to be aware of? This will be a follow up post as my legally savvy wife reviews the insurance offers.

The process itself forces one to stare death in the face as your family medical history, your own medical histoy, current physical fitness and hobbies are examined to determine how likely you are to die in the coverage period. After the statistics are tallied, you receive a quote that begs the question why I am preferred rather than super-preferred. At the same time you know that the company is calculating if 100 people with the same life expectancy request a $1,000,000 30 year policy, how many can die before we lose money? OK, let's set the premium so that we make at least 12% return on assets and call it a day.

Until next time, figure out how your great grand uncle died, keep your immunizations up to date, wear your seat belt, cut back on the chicken wings and reconsider your next sky diving trip.

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