First Rule of Life Insurance

Nate Crosby |

With September comes fall, football, apple fritters and of course everyone’s favorite: life insurance. That’s right, September is National Life Insurance Awareness month.  I’m sure you had that circled on your calendars, so we are going to take few minutes and break down Crosby Advisory’s approach to purchasing life insurance.  As a planner life insurance is something that I take very seriously.  In my practice, I often scratch my head at some of the things we insure first.  It is not uncommon to see someone purchase insurance coverage on their $800 cell phone, or a $0.00 deductible glass coverage for the car, but neglect to purchase insurance on the financial engine that allows for the purchase of that cell phone and car in the first place.  We tend to get insurance backwards. We should insure the financial engine first, and then if we want to insure against losses that are not financially threatening that’s ok, but take care of the financial engine first.   Of course, that financial engine is you.

 Life insurance can be confusing.  There are a lot of different types of policies out there and everyone seems to have a strong opinion.  Buy term insurance because it is cheaper, don’t buy term it’s expensive in the long run, buy whole life, stay away form whole life.  Stop!  I drive a Toyota Corolla because it is financially economical for me as I typically drive 400 miles per week. However, if my job required me to haul a trailer or tote 5 kids around, a Corolla would be a terrible choice.  There are many types of life insurance because there are many types of needs out there.  If someone tells you a product is bad, they likely have another product they want to sell you. So here is simple solution for cutting through the noise.

The first step of life insurance is to get the amount right.  If I were to pass away in the middle of this blog, my wife and children would not care what type of life insurance policy I owned. What they would care about was that my life insurance policy provided the financial means so they can continue their lives without hardship. The amount of life insurance you have is more important than the type of policy.  At least in the beginning.

I will dive a little deeper into ways of determining how much coverage is appropriate for you in a future blog, but for this article just understand that the amount of coverage you choose is the most important step.  Good life insurance companies have products that allow you to change the type of policy along the way as your life needs change. 

Once we select an amount of coverage that meets our needs, then, and only then do we move onto the type of life insurance.  You will hear labels like term insurance, whole life, dividend paying whole life, universal life, indexed universal life, variable life….here is the bottom line.  All life insurance can be broken down into two categories: temporary and permanent.  Temporary insurance is called term insurance and covers you for a specific time period, such as 10, 15, 20 or 30 years.  Permanent insurance is designed to stay with you your entire life.  Which one is best?  Easy, the one that fits your needs and your advisor can help you determine that.   I believe I can construct a sound financial plan with term insurance just and I can do the same with permanent insurance.  Unless someone is dead set (punt intended) on a specific product, I will typically recommend term insurance for the simple fact that getting coverage, any coverage, is the top priority.  Term insurance is simple to put in place, for those who qualify, and if the policy holder decides their needs have changed in the future, we can adjust the type of coverage at any time. I think it is important to select a company that gives you the freedom to do that. Again, your advisor should be able to provide guidance with that. 

The first rule of life insurance: Get the amount right.  Then worry about what type of policy is right for you.  Until we meet again, keep building your life intentionally.