- Many Americans don’t have enough life insurance.
- It’s crucial to discuss it, know what to expect, how much to get and more.
David and Caroline*, both in their early 40s, had just bought a home and wanted to purchase life insurance to help cover their $200,000 mortgage if one of them died unexpectedly. They met with Rebecca, a life insurance agent, who performed a brief interview to assess their health and financial situation. The couple underwent medical exams that showed they both were in excellent health. A few weeks later, David and Caroline were each the proud owner of a $200,000 term life insurance policy.
Less than six months later, they were lying in bed one night when Caroline sat up suddenly, then collapsed—dead from a stroke. A week later, Rebecca delivered an insurance check for $200,000 to the grieving husband.
As unlucky as David was, he was luckier than those whose spouses have little or no life insurance. According to ING’s “Insurance Revealed” study, 83% of those surveyed say they have some form of life insurance. But what they have may not be enough: Insurance giant Swiss Re reports that Americans are underinsured by a staggering $20 trillion.
That’s partly because talking about a spouse’s potential death isn’t nearly as easy as talking about the latest blockbuster or their child’s good grades. Of those surveyed by the ING study, 50% of men and 39% of women said they rarely if ever discuss the family’s life insurance needs with their partner.
The lack of conversation could be because people simply don’t know how to start the conversation.
Gently broach the subject
If you have trouble talking about uncomfortable subjects such as death and taxes—and life insurance—then ease into it by dropping a small hint that can lead to a larger discussion. While clearing the dinner table, mention the Swiss Re study you read about here. Or, mention a neighbor who recently died and wonder aloud how the family is doing.
“Sometimes it takes something dramatic to get people thinking,” says Terry Kaltenbach, a Carlsbad, California-based life insurance agent. “People think nothing of buying a car and insuring it or buying fire insurance on their home. For some reason, that’s not the case with life insurance.”
If gingerly is not your style, try Al Brodbeck’s approach. “I’m very blunt,” says the Yonkers, New York, insurance agent. “I don’t beat around the bush. ‘If you die tomorrow, what do you want to happen to your family? How is your spouse going to pay the mortgage? Where do you want your kids to go to college?’ ”
However you do it, start the conversation. Life insurance is a necessity for most people, especially if either you or your spouse is responsible for some of the bacon that keeps your family fed, clothed and educated.
Think of it this way: If you had a machine in your garage that printed money, would you insure the machine? “Of course you would,” Kaltenbach says. “If you’re a breadwinner in your home, you’re that machine.”
Know what to expect
Fear of the unknown is another major obstacle to buying life insurance, so let’s get rid of the unknowns right now by answering a few simple questions:
“How much life insurance do I need?” Insurance calculators abound on the Web, including ours at NEA Member Benefits, and they can give you a ballpark answer. Answer questions about your age, income, debt and expenses, then click on the calculate button to get an idea of how much insurance you need.
Even easier, multiply your annual income by 5 and by 10. Your life insurance needs should fall somewhere between the two results. “To replace income, especially in this low interest-rate environment, it can take that much,” says Randy Kilgore, an insurance agent in Colorado Springs.
“Who can help me?” To buy life insurance, you have three basic choices in addition to buying coverage through your employer: Buy online, use your phone or meet face to face with an agent. According to ING, just 17% of those who are insured used the Internet or the phone to get insurance, and 36% met with an agent. The majority, 66% , got life insurance through their employer.
Before you decide which option to use, ask yourself, “Whom do I want my grieving spouse to deal with if I die: an 800-number, or a person with a face—maybe someone we know? Could I use some help assessing my needs?”
If you choose to meet with an agent, find a good one by asking friends for a referral. Then, check the agent’s credentials. Is he or she a Chartered Life Underwriter (CLU), a Chartered Financial Consultant (ChFC) or a Certified Financial Planner (CFP)? Has she been in the business for at least a few years? Does he belong to NAIFA or other professional association? The more yeses, the better, Kaltenbach says: “Ask a myriad of questions. The first person you talk to may not be the right one.”
“What will the meeting be like?” Actually, plan on two meetings: one for financial and health questions, and another to discuss alternatives in light of your answers. Prepare a budget beforehand so the agent can understand your income and expenses. If you have a will or trust, have that handy, too.
“Expect a very thorough and confidential analysis of your financial picture, including your goals, wants and needs,” Brodbeck says. Then, the agent can tell you how much life insurance you qualify for. You can pick the maximum or a lower amount.
“What will I have to disclose about my health?” Expect to answer some detailed health questions. Your agent needs to have some idea about your health in order to quote an accurate rate. “If the agent isn’t thorough here, the initial rate she quotes could be far different from the one you actually receive,” Brodbeck says.
Once you sign an insurance application (see below), the agent probably will schedule an appointment for you to meet with a paramedic in your home or at work to ask similar health questions, as well as do a blood test and collect a urine sample.
“What’s the application form for?” By signing the form, you attest to the truthfulness of your answers to the health and financial questions. The application also states the amount of insurance you’re applying for and the projected premium. Typically, you can wait until the agent returns with the actual policy before you write the first premium check, which can be for as little as one-month’s premium.
If you do give the agent a check when you sign the application, “you’re conditionally covered for up to $1,000,000, assuming you don’t have some dreaded disease and told the truth on the application,” Brodbeck says.
About six to eight weeks later, the agent will return with your policy. Depending on what your health actually is, the premium may be the same, higher or even lower than the one initially quoted.
“Can I change my mind?” Life insurance is a unilateral contract. Once the policy is in force, you’re insured for the term of the policy as long as you pay the premium. That also means that you can cancel the policy at any time, no questions asked, with no additional premium required. You also may receive a refund of unearned premium.
*Names have been changed for privacy reasons.