DEALING WITH AGGRESSIVE agents, wading through dense jargon,
all while confronting your own mortality — buying life insurance is
the Perfect Storm of unpleasant financial-planning chores. But don't
fret. From helping you add up your family's needs, to finding the best
prices, to dumping a crummy policy, we have the solutions to your 11
biggest life-insurance dilemmas.
How to...
How to Know If You Need Coverage
The question to ask yourself is, Would my death leave anyone in a
financial bind? For Doug McLeod of Minneapolis, the answer was yes.
Like many people, McLeod, 30, got serious about life insurance in
preparation for the birth of his first child, locking down a $1
million policy in April. If he should meet an untimely end, he
explains, "I want to let my wife stay home with my daughter and not
have to uproot her life completely."
Once you become a parent, any adult in your house earning income
should have life insurance coverage that will last until your youngest
kid gets through college. And in a family without a lot of money
saved, a stay-at-home parent may need a small policy, to cover child
care costs that would be created by that parent's absence.
Even if you belong to the dual-income, no-kids crowd, you may need
life insurance to cover large shared financial obligations such as a
mortgage. For older empty-nesters, though, life insurance is often an
expense you don't need — as long as your retirement nest egg is big
enough to support your surviving spouse. But if that nest egg is
really big — at least $1 million, enough so that your assets will
generate estate taxes — it's worth staying insured, because your heirs
can use the proceeds, which are tax-free, to pay off those
liabilities.
How to Pick the
Right Kind of Insurance
Once you start shopping, brace yourself. You'll likely hear that
permanent life insurance is the solution to all your financial
problems. The pitch will go like this: Yes, a permanent policy costs
more than term insurance (four to 15 times as much), but over time, it
builds a "cash value" you can borrow against, withdraw or use to pay
future premiums.
The money grows tax-deferred, in fixed-income investments with
whole life coverage, or in mutual funds with variable life.
But here's what your agent may not tell you: It'll be a while
before you see any of that cash. For the first two to 10 years, part
of your premiums are paying the agent's commission. Even after that,
the average variable life policy has annual maintenance charges of
more than 2% of your cash value, and many states charge taxes of 2 to
3% of your premiums. Given that, most people are better off buying
term and using the money they save on premiums to invest in other
tax-deferred vehicles such as IRAs, 401(k)s or Section 529
college-savings plans.
Let's say you're a 35-year-old Georgia man who qualifies for
preferred rates, and you buy a $250,000 variable life policy from
TIAA-CREF. Every year you pay $2,500 in premiums; whatever's left
after fees, commissions and the cost of your death benefit goes into
an investment account. If that money earns an 8.5% net annual return,
you'll build up $97,362 in that account after 20 years.
But say you bought a $250,000 20-year term policy instead. That
would cost you $225 annually from Federal Kemper Life, giving you an
additional $2,275 a year to invest as you saw fit. If you earned the
same 8.5% return, you'd rack up $121,687 — beating that permanent-life
account by 25%.
So why do agents push permanent life so hard? Simple: Higher
premiums mean higher commissions.
That said, permanent life can make sense for select groups of
people. Peter Katt, a life-insurance adviser in Mattawan, Mich.,
recommends it as a savings vehicle for people who consistently have
income left over after maxing out their other tax-deferred accounts.
But Katt urges even those clients to cover their baseline insurance
needs — the money to protect their families — with cheaper term life.
Permanent life is also often a better option for older people because
term's price advantage fades as you reach your late 60s.
Katt's advice to those customers who do buy a permanent policy: "Overfund"
it, making big payments up front so you start amassing earnings
faster. Another way to do that is with a low-load policy — one with
low fees (less than 1% a year) and low commissions (10 to 20% of a
year's premium). Reputable low-load insurers include TIAA-CREF
(800-223-1200), Ameritas (800-745-6665) and USAA (800-531-8000).
For the vast majority of families, level-premium term life is the
best option. With that as your foundation, annual-renewable term can
be a good supplement if your family takes on any big short-term
obligations. (Maybe you're amassing debt while earning a midcareer
MBA.) The premiums on ART policies grow slightly as you age, but for
periods of up to five years, they're usually cheaper than level
premium.
How to
Shop for Good Rates
Term life insurance is as cheap as it's been in two decades, thanks to
increasing life expectancies and cutthroat competition. But that
doesn't mean every policy is a good deal. When we poked around for a
$750,000, 20-year term policy for a healthy, nonsmoking 33-year-old
New York male, we found annual premiums ranging from $403 at William
Penn to $1,580 at North American Co. for Life and Health — a swing of
$23,450 over the policy's life.
The Web is your best starting point. But since dozens of sites
offer price quotes, which should you turn to? The answer depends on
how healthy you are.
The cheapest, "preferred" rates go to the 21% of applicants in the
best health. You can generally count on qualifying if you don't smoke,
you have a low cholesterol count (under 250) and low blood pressure
(140 over 90, or lower), and you fall within a healthy weight range
(under 210 pounds for a 5-foot-10-inch man; 175 pounds for a 5-4
woman). If you make the cut, start your online sleuthing at
AccuQuote.com, Term4Sale.com and Quotesmith.com. Each has a large
database of about 150 to 300 insurers and quotes prices to customers
in any state. Also, unlike some competitors, each shows you quotes,
rather than forcing you to call an agent to get your results. (By the
way, young, healthy folks shouldn't bother buying additional group
coverage through their employers. You'll get lumped in with those
chain-smokers in accounting and pay more than you would on your own.)
If you suspect you don't qualify for the medical elite, approach
the Web a little differently. Start with InsWeb.com. This site quotes
from fewer insurers — only a dozen — but it asks for more extensive
data, which means the prices will more accurately reflect what you'll
pay. You'll spend about 15 minutes filling out a questionnaire that
asks for information such as your blood pressure, family medical
history and driving record. The quotes you get will be a good
benchmark for a wider search on AccuQuote and Term4Sale. (Be sure to
designate that you're looking for "standard" rates rather than
"preferred.") Any quotes on those sites that fall more than 30% below
the lowest on InsWeb are likely to be too optimistic. People who
aren't in better-than-average health needn't bother with Quotesmith,
because it won't let you sort rates based on fitness level.
Can you get better deals elsewhere? It's enough of a possibility to
merit more digging.
TIAA-CREF,
Allstate and New York Life (800-710-7945) don't make their prices
available on the big quote Web sites, so it's worth checking with them
directly. Shoppers in Ohio and Washington can find prices from most
insurers on the consumer information pages of their state insurance
department Web site (www.ohioinsurance.gov
or
www.insurance.wa.gov ).
How to Know How Much
Coverage You Need
The average insurance-owning household had $196,200 worth of life
coverage in 2000 — and if that seems like a thin lifeline in the age
of the $400,000 mortgage, your instincts are right. "Most people are
woefully underinsured," says Linda Sherry, editorial director of the
advocacy group Consumer Action. But the solution isn't simply to buy
all the insurance you can afford. Even in today's choppy market, the
extra premiums you'd pay could be earning significant returns
elsewhere.
To find the right amount of coverage, you must weigh your
dependents' spending needs against their future income and assets. Our
worksheet will help you do that. It'll remind you of costs (additional
child care for a suddenly single parent, funeral charges, etc.) and
sources of help (investments, Social Security benefits for survivors).
But remember, this will give you only a rough estimate. Ideally, you
should run the numbers every two years or so to see if your needs have
changed.
Click
here to see our worksheet.
How
to Select the Right Features
Even if you pick term over permanent life, you'll still have some
jargon to wade through to find a policy that's just right for you. Is
there a chance you might still need insurance after your coverage
expires? Then make sure your policy is convertible. That gives you the
option to switch it to permanent at that point, regardless of your
medical condition — a key benefit, because premiums for brand-new
policies can skyrocket as people pass middle age or as their health
deteriorates. Just be sure your coverage can be converted throughout
the life of the policy. Some insurers allow you to convert only in the
first five to 10 years — the time when it makes the least financial
sense to do so. A similar provision worth getting, guaranteed
renewability, lets you buy a new term policy from the insurer when
your current one expires, again without having to "requalify"
medically.
Term policies offer a thicket of optional "riders" to choose from,
but most of them aren't worth your time. Waivers of premium allow you
to keep your policies without paying for them if you become disabled,
but they often increase the price of your policy by as much as a
third. Consider them only if you don't have any other disability
insurance. Spousal riders that extend coverage to your wife or husband
can sound like a good deal, but they're usually more expensive than
buying a separate policy, and your spouse may lose coverage if you
die. And accidental death riders, which double the payout to your
family if you die in an accident, are not only expensive (adding 10 to
15% to the policy's cost) but unnecessary: Does your family really
need twice as much money to live on just because a runaway truck got
you before a heart attack did?
How
to Avoid Getting Burned
Cheap premiums are attractive, but they aren't the whole story.
Signing on with a fiscally fragile insurer can cost you. When insurers
go bankrupt, state-administered guarantee funds make sure any claims
get paid, but there are often huge delays and disputes over payments,
explains industry consultant George McKeon, vice president of Conning
Research and Consulting. And most states set a $300,000 cap on the
death benefits they'll pay on behalf of a failed insurer. Even if a
foundering carrier gets bought, there may be problems. Hundreds of
California families are still tangled in legal disputes surrounding
the 1991 collapse of ExecutiveLife Insurance. Owners of its permanent
life policies lost much of their retirement savings when the company
that purchased ExecutiveLife slashed the value of their cash accounts.
Once you've whittled down the field to a handful of potential
insurers, check out their financial ratings. The price-quote Web sites
post ratings, but they're often a few months out of date, so
double-check your carriers' grades from Standard & Poor's (click on
"Ratings Lists" at
www.standardandpoors.com) and A.M. Best (search by company name at
www.ambest.com).
Firms with Best ratings of A- or better, or S&P grades of at least AA,
are the safest bets. You'll also want to find out whether your
would-be insurer is leaving a trail of irate customers. The statistic
you're looking for is the "complaint ratio," which compares the number
of grievances filed with the number of policies or amount of premiums
the insurer earns in the state. In California, for example, 16 life
insurers have a complaint ratio of 0, meaning no gripes have been
filed that the state has found to be justified. But on the other end
of the spectrum, Conseco Life, troubled by shaky finances, has a
whopping 16.9 complaints per 100,000 policies. Many state governments
track such information, and you can find links to their data at
www.insure.com/complaints. Some states, including New York and
Pennsylvania, either don't keep tabs on gripes or make it difficult to
compare insurers. If your state is one, you can find national
complaint stats for bigger insurers on the Web site of the
National Association of Insurance Commissioners.
How to Pick an Agent
Before you contact the insurers on your short list, it's worth calling
an independent insurance agent to see if he can beat their quotes.
Even if he can't, ask him if he can sell you any of the policies
you've found. Contrary to popular belief, the premiums will be the
same no matter where you buy your policy, and some customers like
having the extra hand-holding during the paperwork. "The sellers'
commissions are built into the price," explains John Henry McDonald, a
financial planner in Austin, Tex. "So you either pay it to the guy on
the phone at Quotesmith, or you can pay it to the guy with the office
down the block who lets your kid sit on his lap and ruin his suit."
For Robert Curry of Los Alamitos, Calif., the extra attention from an
independent agent was just what he needed. "We're in flux all the
time, and the coverage we need is always changing," says Curry, 36,
who in the past six years has gotten married, had two children and
bought several Jiffy Lube franchises. His agent, Rick Dinger, meets
with him five or six times a year to make sure both his family and
business are properly covered.
"It's easier to trust someone [we] know with confidential
information about our finances. And if something happens to me, my
wife knows to call Rick first thing."
To find a good agent, you've got to do more than ask for referrals
from friends. Basic licensing requirements for insurance agents can be
notoriously lax: In some states, all a would-be agent needs to do is
pay a small annual fee (usually around $50) and pass a licensing exam
that a fifth-grader could ace. So look for agents who have the
designation CLU (Chartered Life Underwriter). To earn these letters,
an agent needs three years of job experience. CLUs also take about two
years of course work, including classes in financial planning. That
can make them helpful in fine-tuning your decisions about how much
insurance to buy and in figuring out, say, whether it's better to name
your wife, child or widowed mother as your beneficiary.
CLUs can be especially useful in finding policies for clients who
face higher premiums because of health problems or risky lifestyles
(think hang-glider pilots and scuba instructors). One good litmus test
for would-be agents in these cases: Ask them if they have experience
with "impaired risk" coverage. If you get a blank stare, find another
candidate.
How to Cram for Your
Medical Exam
To buy a life insurance policy, you'll likely need to take a
rudimentary physical. Two things your prospective carrier will be
checking are your cholesterol levels (a predictor of heart disease)
and blood-sugar scores (a sign of potential diabetes). What you may
not know is that your short-term diet and exercise can skew the
results. Blood-sugar levels, for example, can swing by up to 50%
depending on what you just ate. And even a small change can push you
into a more expensive rate category.
So while sucking in your gut won't help you save on your insurance,
avoiding a steak dinner and other high-salt-and-cholesterol foods for
24 hours before the exam just might. And to keep sugar and caffeine
out of your system, don't consume anything other than water for at
least eight hours beforehand. Also, for your blood pressure's sake,
forgo strenuous exercise for 24 hours.
"I hear horror stories from people who ate a jelly doughnut right
before an exam, and their premiums turned out hundreds of dollars
higher," says Richard Eisenberg, an agent in Newton, Mass. "People
should fast, and if they forget and eat something, they should send
the paramedic home and reschedule."
How to Challenge Your Health Rating
You've always assumed you had normal cholesterol. But one day your
prospective insurer informs you that you've got the LDL levels of a
man with an out-of-control Big Mac habit — and that your premiums will
cost hundreds of dollars more than you expected. It's worth
double-checking the results with your own doctor because those nasty
scores could very well be a mistake. All kinds of things can go wrong
with the insurer's test. For one thing, the paramedics who do the
exams often have several appointments in a row, so they may not get
the blood samples centrifuged right away, allowing the red blood cells
to degenerate. That can throw off blood-sugar and cholesterol scores.
Insurers are well aware of this, so you stand good odds of winning if
you challenge their results. "If we're given both a paramedical lab
result and that same test done in a customer's physician's office,
we'd give more credence to the physician every time," says Dr. Robert
Watson, who is secretary and treasurer of the American Academy of
Insurance Medicine and works with life-policy underwriters.
The discrepancy doesn't have to be glaring to justify a challenge,
as one SmartMoney editor found when he applied for a 20-year term
policy with American Mayflower Life Insurance. His cholesterol scores
barely knocked him out of the "preferred plus" category, so he asked
his own doctor to retest him. His results improved slightly, and his
M.D. ran an additional test for cardiac risk that he scored well on.
He sent the results to American Mayflower — along with a note
suggesting he might take his business elsewhere if his rating wasn't
revised. The move paid off: He qualified for the elite rates, and
while the additional tests cost him $210, the better premiums will
save him $2,400 over the life of the policy.
How to Insure an Unhealthy Life
There's something Darwinian about life insurance: The fittest always
get the best deals. At the other end of the scale, just under 5% of
shoppers are judged to be "substandard" or "rated" risk — and they can
spend anywhere from five to 20 times as much for insurance as a
"preferred" client. Heart disease, diabetes or rheumatoid arthritis —
all relatively common among folks 50 and up — usually place you in
this risk category, and so do multiple sclerosis, hepatitis C, a past
stroke or a recent history of certain types of cancers.
If you're grappling with health issues, find out whether your
employer offers supplemental life insurance coverage through a group
plan, which will be cheaper for you. Once you've maxed out that
option, look into one of the national carriers that specialize in
writing coverage for people with serious health problems.
They include CNA (800-262-0348), Empire General (800-688-3518),
Banner Life (800-638-8428) and Guarantee Trust Life (888-898-3279). If
you submit medical records that show you can control your health
problems with medication and therapy, some of these insurers will
offer you rates only 5 to 25% higher than premiums for those in
average health. "Insurers have learned a lot over the past 10 to 20
years about how medical care balances out the negatives of an
illness," says Mary Jo Fox, a chief underwriter at CNA.
Even after you're stuck in a high-risk category, most insurers are
willing to rewrite your policy later with a lower premium, if your
status improves. You'll usually need to wait until the policy passes
its first anniversary before you can make any changes. And be prepared
to produce test results taken six months to a year apart to show your
health turnaround is no fluke.
Paying high premiums because of your nicotine habit? Abstain from
cigarettes for three years and most insurers will upgrade you from
"smoker" rates. To prove your virtue, you'll need to have your urine
tested for nicotine and have your doctor certify that you've left the
smokes behind. Your bank account will thank you. At MONY Life
Insurance, for instance, the annual premium for a 20-year, $750,000
standard term policy on a 40-year-old Denver woman who smokes runs
$2,428. For a nonsmoker? Only $928.
How
to Dump a Crummy Policy
Getting out of a term policy is easy: Just stop paying your premiums.
But dumping permanent coverage is much more complicated. For that, you
can blame the surrender charge, which insurers take out of whatever
cash savings you've built up. This fee can range from a year's premium
to as high as 10% of the policy's payoff value, and it stays in effect
10 to 20 years after you buy in.
If you're in the first year or two of a contract and want out, no
sweat. You haven't built up any cash value, so all you'll lose are the
premiums you've already paid. After that, you're better off staying
put for a while. Surrender charges usually decline as the policy
matures, and once they hit zero, it's fine again to consider cashing
out. If the math is swamping you, submit your plan to the
Consumer
Federation of America, and for $50 to $75 its analysts will walk
you through the surrender decision.
There's another way out of a bad policy: A maneuver called a
Section 1035 lets you swap the savings in your current policy into a
cheaper one, or into an annuity. Under some circumstances, that move
is tax-free. Unfortunately, some insurance agents use this technique
to roll customers from one high-commission policy to another, a
crooked practice called churning. "That's one of the rackets that
costs people the most money," warns James H. Hunt, a life-insurance
actuary with the CFA.
If you're considering the switch, make sure you have help from a
financial adviser — someone who won't earn a commission off the swap.
