Contrary to typical advice, shopping for life insurance is a big decision! Life insurance isn’t just an afterthought, it should be something you think carefully about. After all, with the right policy, you can automate your savings and start your journey to generational wealth.
Getting the right life insurance for your lifestyle is a matter of asking the right questions. That way, you get what you want, and don’t have pesky buyer’s remorse. We’ve put together a list of some of the most important questions you can ask while you’re shopping for a policy. (And, we’ll even touch on why some common questions are less important than you’d think!)
How to Choose the Right Life Insurance Company
When shopping for life insurance, it’s common to have questions and concerns about which company to choose. This is especially true for whole life insurance, since functions like dividends and policy loans can differ by company structure. Here are some questions you can ask to get clarity about the company you work with.
Is it a Mutual Company or a Stock Company?
Prosperity Economics advisors tend to work with mutual life insurance companies because they make decisions in the best interests of policy holders. When you buy a life insurance policy from a mutual company, you become a partial owner of the company. As such, you earn dividends on profits with a “participating” mutual company.
While the dividends are not guaranteed, since exact profits are not guaranteed, most mutual companies have paid dividends uninterrupted for decades (or even centuries). One reason dividends are reliable is because mutual companies make rather conservative investments. They don’t make risky bets in the name of profits, and instead focus on longevity and strength.
Stock companies are more concerned with making profits for stockholders, as opposed to their customers. This means they might not have your best interests at heart, including the longevity of the company. Stock companies may be willing to take on a greater risk in the name of profits.
Besides stock companies and mutual companies, there are also mutual holding companies. These are typically a hybrid of the two, which generally means that a company is demutualizing. There is also something called a fraternal company, which operates to benefit members, such as a church or other organization.
Does the Company Have a Long, Solid History?
Longevity is critical! The companies that have been around for decades know what it takes to stay around. They don’t make decisions that may threaten the viability of the company. In fact, it’s a good rule of thumb to seek a life insurance company that has been in business for at least 100 years. And if you’re seeking dividend-paying whole life insurance, it’s worth looking at the company’s history of paying dividends.
Is the Company Well-Rated?
Rating agencies are still one of the best ways to determine the financial strength of a company. It’s a good rule of thumb to buy insurance from companies with an “A” rating, or better (AA, A++). Rating agencies that have this information include Moody’s, A.M. Best, Fitch, and Standard & Poor’s. Long-standing mutual life insurance companies tend to have excellent ratings, so there are many options you can be comfortable choosing.
Shopping for the Right Life Insurance Product
While it’s wise to find a strong company, it’s arguably more important to choose the right product. Not all life insurance products serve the same functions, and you don’t want to be stuck with a product you don’t actually WANT.
Get what you want and avoid buyer’s remorse with these questions.
Is Your Death Benefit Guaranteed for Life?
If you’re looking for permanent insurance, this question is critical. (Term insurance doesn’t apply here.) True permanent insurance is written in the contract, and YES, you should read the fine print.
Some policies promise permanent insurance, but use tricky jargon that obscures the truth: it’s NOT permanent. Be cautious of life insurance policies that require a paid rider to guarantee permanent coverage, or have language that promises permanent coverage “to age 100” or “guaranteed for 20 years.” These are not true permanent policies, and if you live longer than you think (which many people do), the policy may never endow.
Endowment is an important part of a truly permanent policy. A policy endows when you reach a certain age, at which point the cash value of your policy is designed to equal your death benefit (think of your cash value like the equity of your death benefit). At this age, you receive your death benefit in full. Endowment age used to be 100, yet is now 121.
Endowment is the true mark of a permanent life insurance policy, because if it’s in place, it is guaranteed to pay out no matter what. There’s no way you can outlive the death benefit or lose it, if you pay your premiums. Unfortunately, this is just not the case for many universal life insurance policies, which can implode, or coverage can end at a certain age.
Can the Guaranteed Death Benefit Be Jeopardized?
We like to avoid absolute statements, however, when you are shopping for insurance, ALWAYS read the fine print! Some life insurance products are designed with flexible premium payments or policy loan provisions that can actually nullify your guaranteed death benefit. Flexible premiums can seem like an attractive proposition, yet in practice you may be underfunding your policy this way. Especially since universal life insurance policies, which have these flexible premiums, can continue to raise the costs of your insurance over time. These fluctuating fees and costs can also make policy loans detrimental.
We recommend whole life insurance because of the cost structure. Whole life insurance has level premiums over your lifetime, which contribute to your cash value. Since the risk to the insurance company is highest upfront, costs are greater in the early years. Over time, though, these costs become less and less. This is because the actuaries have done the math to make it this way. Your level premiums are designed to fund your policy exactly as it should be funded so that your policy can endow by age 120 (see question above).
If you like the idea of flexible payments, you can do that with whole life insurance. The idea is that you have a guaranteed base premium you know you can afford, with a Paid-Up Additions (PUA) rider that lets you contribute MORE if you want. This means your premium cannot be changed on you, yet you have the option to make additional contributions up to a certain limit.
Can You Save Into Your Policy for as Long as You Wish?
One of the wonderful things about cash value life insurance is that it can help you automate your savings. After all, it’s liquid, certain, and growth-oriented. However, some policies are structured so that you only pay premiums over a certain period of time, like 10 years. While there are certainly advantages to this, sometimes this prevents people from continuing to contribute when they WANT to.
Unlike other types of insurance, life insurance doesn’t have to be an expense. With whole life insurance, when you keep your policy in-force, every dollar you contribute (plus any additional growth), comes back to either you or your family. And the cash value grants you access to the money while you’re living. Continuing to pay into your policy may be exactly what you want.
Are Policy Guarantees Based on a Rate or a Dollar Amount?
Financial media teaches us to think about everything in terms of ROI. However, would you rather have fewer dollars earning a (possible) higher rate, or more dollars growing for you at a steady rate, guaranteed?
Universal life insurance is often sold as “permanent” insurance that can earn you a sky-high return with only modest contributions. However, many people are disappointed in the reality—that a high interest rate doesn’t mean as much on a low account value. Not to mention, those rates are based on the stock market, and are not guaranteed.
Over a 30-year period, you’re going to be much better off earning 4% on $1,000 than you would be earning 8% on $100. Whole life insurance policies guarantee a minimum dollar amount, which triggers a minimum net return. This guarantee also keeps companies beholden to the interests of policy owners, in order to keep costs down.
Are Returns Correlated to the Stock Market?
While many people often assume some sort of risk in their financial lives, we believe that the ideal FOUNDATION should be certainty. When you have certainty—the knowledge that an asset won’t lose money, and will perform as expected, or better—you make room for a bit more uncertainty in your life. However, the certainty must be there first.
Since the growth on a whole life insurance policy is not correlated, or dependent, on the stock market, you can have a degree of certainty. With whole life, you know that your policy cannot lose value, and will continue to grow steadily with premium payments. This makes it a great emergency/opportunity fund, because your money won’t disappear.
If you are looking at a policy that is correlated to the stock market, like an IUL, consider these questions:
- What is the current participation ratio?
- Is there an additional fee for participation, and if so, how often is it paid?
- What is the current maximum investment / index cap?
- What is the guaranteed minimum investment / index cap?
- If the stock market is level or losing, how can policy costs affect the minimum returns of the policy? (A policy with a 0% or even a 2% minimum rate with 2.5% costs will lose money.)
- Do I really want my savings plan to be compromised at the same time my investments are potentially losing money?
Does the Product You Want Have a History of Lawsuits?
If you google “universal life lawsuits,” you will unfortunately find pages of unhappy consumers who didn’t get what they expected. Universal life insurance is a newer product that doesn’t have the time-tested strength of whole life, yet is treated like whole life insurance nonetheless.
Overall, universal life insurance policies are misleading. A game of smoke and mirrors, and many people don’t get what they expect when they buy it. If you’re seeking permanent coverage, be cautious in using UL or IUL.
Want Help Shopping for Life Insurance?
Working with a Prosperity Economics Advisor ensures that you get the kind of insurance guidance that can help you build wealth, see how insurance fits into your personal economy, assists you with illustrations, and much more. To get in touch with a PEM Advisor, contact us, and we’ll connect you with someone in our network.