Life Insurance 101

Life insurance is one of the most controversial and, in my opinion, convoluted personal finance topics today. Even once you get past the eternal debate of term vs. permanent life insurance, then you must move on to determining how much life insurance you need, what method do you use to calculate that amount, and who do you buy it from?

For sake of simplicity, I will share with you that my opinion in MOST situations (for you insurance guys, I realize that this doesn’t apply in every situation) but in MOST situations, insurance and investments should be separate. When an insurance company sells a product that has a savings or investment vehicle built in (i.e. universal life, variable universal life, etc.), what do you think they are doing with your money? They are investing in stocks, bonds, and cash. This is basically the same thing you could do in an individual investment account.  If you can essentially do this yourself, why does it make sense to pay an insurance company extra fees to manage these sub accounts?

Once you decide which type of insurance makes the most sense for your personal situation, then you must decide how much insurance to buy. I feel there are three specific methods that can be employed to determine the amount of insurance you need. The three methods I explain in the show are: the income replacement method, the debt and future obligation method, and the human value method. In all reality, the best way to grasp the nature of your true insurance needs is probably a hybrid of all three of these. I also go on to talk about the benefits associated with individual policies vs. group policies offered by an employer.

The final decision that must be made when selecting appropriate life insurance is which company to go with as well as which kind of agent. In the show, I explain the difference between captive agents, independent agents, and direct agents. There is a really neat tool that can be used and is offered by:

This tool allows you to get instant life insurance quotes from different companies without having to provide personal information. As a side note, I have known Michael since I was a kid (I went to school with his daughter), and I use him for my personal life insurance needs (I do not get anything for this recommendation).  I finish up the show by explaining the benefits of using an established agent versus an agent that is young, hungry, and still trying to pay the bills, and why having an individual you can hold accountable and track down may be better than having an 800 number agent.

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