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Life Insurance Doesn't Have to Be So Hard
Deciding to get life insurance requires you to face your own mortality. Fortunately, the economics of it are not nearly as complicated.
Jesse Will is an Austin, Texas-based journalist and dad who has contributed to The New Yorker, Rolling Stone, The Wall Street Journal, Men's Journal, Pitchfork, Popular Science, Road & Track, and others. He’s not a financial genius, but like so many parents, he’s here to learn.
Life insurance is a personal thing. Maybe too personal: obtaining it is something you avoid pulling the trigger on, and it sits and sits on your to-do list — I know it has on mine. As parents, we avoid it, because imagining our children growing up without us is almost too painful to think about. But I've discovered that discussing life insurance doesn't have to be an emotionally wrought thing — it's a pretty rational choice, actually. You are making plans for your family to continue on as best as possible with the way of life that you have imagined for them — with a replacement for your income that will help pay the mortgage, put food on the table, and help send your kids to college, in the unlikely event that you pass away.
Although it is unlikely that one of us dies due to COVID, the pandemic certainly figured into my wife and I finally forcing the discussion and finding policies. We're not alone. According to a recent NerdWallet / The Harris Poll study, a quarter of those with life insurance purchased it or increased their policy amount due to the pandemic. After the industry spent decades in decline, Americans filed four percent more applications for life insurance in 2020, driven by people under 44. That’s not to say that the life insurance companies took the pandemic smoothly: many reacted early on in the pandemic with policy moratoriums, delays, or extensive COVID questionnaires. But many of the kinks have been ironed out. “This is probably one of the most opportune times to look at life insurance,” says Ted Jenkin, the co-CEO of oXYGen Financial, Inc. Here’s the way to do it.
1. Go Term.
There are two types of insurance on the market — term and whole life. Term insurance is the easiest and most cost-effective: you pay a monthly premium for a set term — say ten, twenty, or thirty years. If you pass away before the term, the disbursement, whether it’s a couple hundred thousand or a couple of million — goes to your spouse (or whomever you’ve designated). “Term allows you to buy a lot of coverage for an inexpensive dollar amount. The con is it's a use it or lose it,” says Paul West, a Managing Partner at Carson Wealth. The other type of policy has various names — permanent, universal life, and whole life are some of them. With this type of policy, you’re paying generally a much greater amount each month than you would with a term policy, with the idea that you’re building up some cash equity in the policy that you or your heirs could later collect. Jenkin uses a housing metaphor to describe the two types of insurance: “Term is renting an apartment. You pay a certain amount of money every year, you get a certain amount of life insurance. If you never die, you basically rented the insurance. Permanent insurance is like buying a home. Part goes to insurance, part goes to your equity. They’re almost never a good idea,” says Jenkin.
2. Determine how much coverage you need.
It’s easy to jump on an insurance company’s website and fiddle with a slider while asking yourself how much insurance you need. A couple hundred thousand? A couple million? But that’s not a smart way to go about it, according to Gary Walker, a Founding Partner at Seacoast Wealth Management. “With young families, I’ll ask “How did you come up with how much insurance you need? Typically they guess. I tell people to not guess.” A general rule of thumb is ten times your annual salary, but you might have outlying factors: the length of your mortgage, outstanding debts, a couple of college educations to pay for. A calculator at Life Happens should help you find the right ballpark.
3. Shop around.
Rates can vary — by a lot. As a healthy 41-year old shopping for a 20-year, $1 million term policy, I saw rates from just over $50 a month up to $148 a month. That’s a difference of over $23,000 over the 20 years. So yeah, shopping around can save you. I started by calling Accuquote, a quoting and brokerage firm that works with multiple carriers. I filled out a questionnaire on their website answering basic health questions — height, weight, whether or not I smoke, etc. — and quickly afterward, a rep called me to follow up with more questions about my parents’ health histories, my driving record, and more. At the end of the call, I had quotes from four carriers, ranging from $50 to $60 a month. I repeated the process with USAA, where I have car and home policies. Then I tried a few of the online-focused carriers you might have seen on Instagram or on a TV commercial: Ladder, Bestow, and Ethos. I checked each of the competitive companies’ reviews and financial strength ratings on Investopedia before opting for a $60/month plan from USAA. Evaluating each of the companies’ financial strength ratings is key, says West. “If a policy costs you $100 more a year than a competitor’s, but you’re more comfortable that that insurance company will still be around in ten or twenty years, it’s worth it.”
4. Don’t wait.
Term life is cheaper the younger you are — if you’re in your twenties or thirties, a policy will be far cheaper than if you’re shopping for one at fifty. The rate doesn’t change, so the sooner you act, the better.
5. Think of it as part of your larger financial plan.
Prior to COVID, I’d thought of life insurance as a kind of morbid lottery ticket payable to your survivors. And I’d thought of its agents, as, well, kind of pushy (thanks to Stephen Tobolowsky’s unforgettable portrayal of the indefatigable insurance agent Ned Ryerson — BING! — in Groundhog Day). But I’ve come to understand it as just a part of the much bigger plan for my family’s future — whether I’m here or not. Last Friday night I got an email that my policy was approved. I felt strangely relieved. And then I started reading books on longevity, determined to lower the chances that that policy would ever need to be used.