How to buy life insurance/ disability insurance?
December 10, 2014 8:55 AM   Subscribe

My wife and I (under 35, good health) would like to buy life insurance/ disability insurance. We don't know where to start.

We don't want to end up with an useless policy that excludes everything and get screwed in the end. We are not permanently settled in one place and might move to another state in the future.

From what I heard life insurance is not like auto/home where you can switch companies for better rate/coverage. Does it make more sense to stick with the same policy once you get it?

Basically what I'm looking for is buying life insurance/ disability insurance 101 instructions.
posted by WizKid to Work & Money (13 answers total) 14 users marked this as a favorite
 
In general, life insurance gets more expensive the older you get. You can lock in your price for a certain amount of time when you buy your policy. If you change to a different provider, the clock resets and you get a new price.

The cheapest life insurance is called Term. You decide how much you want, get a quote for a rate, and you pay that for the length of the policy (5, 10, 20, 30, etc years). If you die, you get the insurance amount, if you don't you get nothing.

Other types of policies add different features and benefits (eg: ,maybe your rate changes over the life of your policy, maybe you pay higher premiums and get something back at the end even if you don't die, etc).

Keep it simple, and make sure you do some research before talking to a salesman.
posted by blue_beetle at 9:40 AM on December 10, 2014


We have several insurance policies (for complicated reasons) through both Northwestern Mutual and New York Life. I have been especially happy with Northwestern (not unhappy with NYL, we just haven't had as much occasion to need assistance from them). We have whole life policies (which were gifts and purchased when one of us was an infant), term life (which is what you probably want) and disability coverage (to supplement what we have from work). We have a representative at each place. We tell them what we want and they tell us how to get it ("if I die I want my husband to be able to pay off the house and pay for the kids' college" "I want just the house covered but if we have kids we want to be able to increase it" "I want disability coverage if I can't work in THIS occuplation, as opposed to at all"). They'll want to sell you whole life because they make more money on it, just keep saying no unless you need the tax benefits it provides (if you don't know, then you don't).
posted by dpx.mfx at 10:45 AM on December 10, 2014


While there are scams & exclusions out there, the real problem for most people is understanding what they're buying.

Most life insurance policies are some variant of "whole life" policies: in the simplest case, you buy a policy worth a set amount, pay equal premiums for, say, 20 years, and when you die it pays its face value. The thing is, unlike homeowners or auto insurance, you are not insuring against an unlikely event - you are pretty much guaranteed to die, eventually, so the policy will eventually pay out. So between what you pay and what they earn from investing your money, on average the company has to take in as much as you'll get. If you die young, the company pays you more than you put in. If you live to a ripe old age, they pretty much pay you back what you gave them, plus interest, less expenses, less what they had to pay to cover those unlucky enough to die young. Of these factors, the most interesting is their expenses, which often include substantial sales commissions. For most people, whole life ends up as an expensive way to fund a savings account. But then you never know whether you're one of the lucky ones.

The main alternative is term insurance. With pure term insurance, you generally pay for a year at a time, and each year your premium reflects the odds that someone your age will die within the year. There is no savings component - as soon as you stop paying, you stop being insured. The result is that term insurance premiums are a lot lower than whole life premiums. But then, you are not guaranteed a payout.

Now, in an ideal world, you could do the following: instead of buying a whole life policy for, say, $100,000, buy a $100,000 term policy. Then, take the difference between the term premium and the whole life premium, and put it in a retirement account. Each year you look at how much your retirement account is worth, and you only buy enough insurance to cover the difference between that and $100,000. Eventually your account will be worth enough that you can stop buying insurance. The big advantage of this approach is that you don't pay commission on the money you put into your savings account. Realistically, you need to buy policies in fixed amounts; also, there are different tax implications for the different strategies.

The difference in premiums is HUGE, by the way: for a 30 year old male, for example, this site came up with $672/year term insurance premium vs $8230 for a whole life policy with the same face value.
posted by mr vino at 11:17 AM on December 10, 2014 [2 favorites]


This explanation was very useful to us: Permanent vs Term Life Insurance.
posted by crush-onastick at 11:36 AM on December 10, 2014


Does it make more sense to stick with the same policy once you get it?

Yes, if you find a good life insurance policy, you should just stick with it and not change it later. The reason for this is that the older you get, the harder it gets to qualify for a general life insurance policy at all and the more expensive it gets. If you get a life insurance policy at, say, age 25 and you do not currently have any known significant health issues and you cancel that policy for some reason at, say, age 35 and then go to buy a new one, the new policy is likely to exclude any conditions you developed between age 25 and 35 as "pre-existing conditions" not covered under the policy. So if you get some serious diagnosis and it is the most likely reason you will die, a new policy may exclude that and pay out only for anything else and not that. Which is kind of sucky on your end. Your premiums are also likely to be higher even if they do not exclude anything, just because there are ten years less in which to get money from you to cover the expected expense of paying out when you die.

Insurance works a little bit like Las Vegas, only "you bet your life": You need a whole lot of people making small losses on a regular basis in order to cover both the cost of keeping the doors open and the occasional large payout. So, no, they don't want you to come in at age 79, get a policy for a few bucks a month and get some whopper of a payout when you die a few short months later simply because you are old. Some of the better paid people in the insurance industry are the actuaries: The folks crunching the numbers to determine what needs to be charged and so on in order for the business to be financially viable.

From the classes I had to become a certified life and health insurance specialist, here is the 101 for life insurance:

Why do you want it? What is it intended to cover?

A common reason for wanting life insurance is to make sure the wife and kids are adequately cared for should the primary breadwinner die. Until I had this course, I had no idea how that was supposed to be valued or even that there was a formula for it. Here is a scenario from one of the classes I took:

You have a 14 year old child and that is your only child and you want to make sure they are cared for through the end of college. So, based on the assumption of 4 years until kid is college age plus 4 years of college, you multiply the primary breadwinner's current salary by 8 to get a baseline idea of how much coverage you need to meet that need.

In that scenario, the solution in class was to get a term policy for just those 8 years on the theory that once the kid was a grown adult with a college degree, insurance was no longer needed to make sure they would be cared for in the event the primary breadwinner dies unexpectedly.

However, having said that, I am very for some variation of the suggestion mr vino made of paying as little as possible for insurance and then investing to meet any expected financial need. If your concern is funeral expenses, instead of getting insurance, buy a prepaid funeral from a funeral home. Bonus: You get to decide exactly what your funeral will be like and no one needs to wonder about that while grieving you. Create a nest egg so that there is money when you retire or money when you die, with no stipulations that "but if you didn't die for the right reason, you can't get that money" and so on.

A cheaper alternative to whole or term insurance is, for example, accidental death policies that only pay out under specific circumstances. If you live pretty conservatively and you have reason to believe you will live a long life unless some crazy unexpected thing happens, that can cover that possibility -- but only do this if you are also doing things like building your next egg, building equity in a house, paying for a prepaid funeral and so on.

I am not crazy about life insurance. I think it is better for your sanity to find alternatives to life insurance as much as possible. Though I realize there are scenarios where insurance is the thing that makes sense, I think far too many people do not make that distinction and just default to life insurance as the answer and it goes weird places psychologically.
posted by Michele in California at 11:43 AM on December 10, 2014


I'd also suggest you look into long-term care insurance. This stuff gets outrageously expensive the older you get - for sure do it before you turn 50, but if you can swing it now, do so.
There are lots of good/bad LTC providers - I don't have any research links, but we went with Genworth, who has been in the business a long time.
posted by dbmcd at 12:26 PM on December 10, 2014


We used selectquote to locate a Term Life policy and it seemed to work fine. We're paying premiums that seem like they make sense and our policies are with a major company that's highly rated.
posted by jasper411 at 12:42 PM on December 10, 2014


Michele in California's explanation is good and poses an important question. Specifically: What do you want it for? Additionally, how much do you need?

Do you want to replace your income if you die during your working years to support independents? Do you want to create an estate? Figure out what your goals are and how life insurance can help you meet your goals.

Different types of life insurance will help you accomplish different things. Remember that most term policies will lapse at a certain age, or that at the end of the term the annual renewable premiums are astronomically higher.

Same with disability insurance; you need to understand your goals and how this piece fits into your larger plan. It is much harder to get disability and long term care insurance today as many companies are dropping out of these markets. If you are young and can afford it, get these now. It is insanely hard to get either when you are older (in your 60s), primarily because of the health underwriting.

Remember that this should be a piece in your financial planning puzzle. It might make sense for you to seek out the help of a fee-for-service financial planner (not one who will funnel you into a particular vehicle because they will get a fat commission).
posted by Barry B. Palindromer at 2:20 PM on December 10, 2014 [1 favorite]


There are some important differences. Life insurance involves very few disputes, since the triggering event is usually not at issue. Most policies, if not all, do not exclude suicide after two years, so that is usually not a point of contention.

The triggering event in a disability policy is disability, but that leaves a lot of room for dispute. Disability must be certified, and often it has to be recertified after a time. Some companies are known for frequently and repeatedly declaring someone no longer disabled, and discontinuing payments as a result. You want to ensure that you are dealing with a company that is known for reputable claim handling.
posted by yclipse at 2:21 PM on December 10, 2014


Also, the fact that you are moving to another state doesn't really matter. Once you coverage is in force, it will remain in force as long as you are paying your premium.
posted by Barry B. Palindromer at 2:21 PM on December 10, 2014


Thanks for all the responses so far.

"You want to ensure that you are dealing with a company that is known for reputable claim handling"
Recommendations are welcome :-)
posted by WizKid at 4:01 PM on December 10, 2014


check your memail
posted by Michele in California at 4:14 PM on December 10, 2014


Go to bogleheads.org, read the insurance part of the wiki, and post there. Disability insurance in particular is super complicated and it's easy to get a policy that sounds good but actually isn't. Bogleheads has insurance experts who post regularly and can help you find a good policy.
posted by medusa at 1:38 AM on December 11, 2014


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