At the end of the last blog I said I would write about a key change in the financial services world which boils down to is your sales person required to offer you the best product for you–acting as your fiduciary– or simply one that is “suitable”. A subtle difference that at this point may or may not ever become legally relevant. Our current President has delayed enacting the fiduciary rule. So…
Let’s Focus on Need
IF we trust our advisor to act (advise) in our best interest then the rule that requires that performance is not important to us. We can focus on determining our need. That will be the bulk of this blog. But before I leave the trust issue let me acknowledge a couple facts of life in the insurance world. Most insurance agents earn their living through commissions paid by you the buyer. That makes some policy types more lucrative for them to sell.
Consequently determining need gets back to working with someone you trust. Do you need a $500,000 term policy that requires a $60/month premium, or do you NEED a $500,000 cash value policy that requires a $600/month payment? The cash value policy will have other features/benefits so the question is which do you need? I can not overstate the importance of knowing what is in the heart of your advisor. Is that person working for you regardless of the fact that technically he is working for the insurance company?
Purpose Helps Define Need
Given the complexities of insurance products and the variety of losses we might want to insure against, we can’t realistically cover the topic completely in a blog or even a series of blogs. However, I will help you self exam to get an idea what approach you should take when buying.
Most people need some life insurance and I know it best, so I will use it as my focus. Also, the premiums are often the biggest and the most variable. This is certainly not to minimize the importance of disability, medical, home owners, auto, long term care, and… I think you get my point.
Purpose is Always to Protect
That is an important point to keep in mind. No matter how exotic the policy design may be with all the bells and whistles the agent will include and expound upon, the purpose is protection against loss. LOSS of income that would be used to pay debts, pay ongoing living expenses for those dependents remaining, pay into a retirement plan for a spouse that would otherwise have nothing when that age comes, PROTECT against loss of wealth because your estate will need to pay taxes at your death due to your leaving a large estate ( A PROBLEM FEWER AND FEWER ARE HAVING!)
Guidelines From a Fiduciary
I am a fiduciary. Required to act in my client’s best interest. Happy to do it. It was in my heart before I received certifications that require it.
- Buy as much life insurance as you can afford when you are young. Mostly term because it requires a lower monthly payment. Lower payment means you can buy more death benefit.
- Buy RENEWABLE, CONVERTIBLE so you can extend the coverage beyond the original term. Convertible so you can change from term to cash value if your situation allows for that in the future.
- There are software packages that will help you and your advisor determine your overall need. It will factor in inflation, Social Security benefits for surviving dependents, taxes, and more. Use that information. But if you want a simple starting point take the amount of money you are spending each month, multiply by 12 to get your annual need. Multiply by 20 and you have a starting point for a death benefit. A $50,000 annual need means $1 million in insurance. Facts and circumstances may change that amount, but it is a place to start. I have yet to meet a beneficiary who felt they received to much life insurance payout.
More later…