Dealing With Reality- Life Insurance

I’m a pretty inquisitive person. I like to know what’s going on in the world around me, and I like to know how I’ll be affected by the economy. Recently I’ve had more questions than answers, and last week I decided I was fed up with not understanding one issue in particular: life insurance. It just so happens that my husband, Paul, is an agent with The New York Life firm here in Wichita, and was the perfect one to satisfy my need for knowledge. I sat him down one night and let him have it: I asked him everything I’ve ever wanted to know about life insurance.

Now, I didn’t have a whole lot of know-how on the subject to begin with, so he was patient with me, as I imagine he is with his clients who have never interacted with an insurance professional before. The conversation lasted more than two hours and I’ve never been more intrigued. Sipping wine that night after dinner, he gave me insight as to where some of our hard earned money was going.

First, though, I wanted to verify that the purpose of Life Insurance was to make sure your loved ones were taken care of should anything happen to you. I was mostly correct, but he made sure to tell me about the different kinds, and what people need in different situations. Turns out there are Term Life, Whole Life and Universal Life policies available, and depending on your financial status and market interaction, one could be better for you than the other.
After I felt fairly confident I could explain to someone else the differences between the three, I asked THE question:

“Why would anyone spend the money on life insurance, especially if they don’t exactly have extra cash laying around, when chances are nothing is going to happen to them?”

He took a sip of his wine, re-filled my glass, and answered:

“Well, it’s something a lot of people avoid. Seriously, who likes to think about death? But it’s very important; just ask those who have been diagnosed with a terminal disease or ask their families who have been left struggling to pay bills. Your biggest priority should be that your family can continue their lives should anything happen. Imagine, as painful as it may be, life without the people you love most in the world in it. Do you want to buy your daughter’s wedding dress, even if you’re not physically there to swipe your card? Do you want to be a wife or husband who can still provide for your family if your life is cut short? Do you want to be a grandparent who leaves an endowment for your children, grandchildren and great-grandchildren? Or what about an aunt or uncle who helps their niece or nephew buy their first house? Have you thought about setting up an education fund for your kids? If you have dreams of doing any of that, you need to sit down with a professional and think seriously about life insurance.”

He stopped to swirl the contents of his glass, and I took the chance to slip in another question:

“But aren’t there other things you can do with your cash to make smart decisions for the future?”

“Oh yea, there are tons of options.”

“Like what, investing in the stock market or put money toward your 401K? Well, with the economy like it is, I personally don’t feel real good about throwing my money to the dogs, and I don’t know many people who really understand their 401K’s anyway.”

“Keep in mind that all investments (savings, life insurance, etc) are like building a financial house. You must start with a very strong foundation, which is protection. This protection is life insurance, or anything you wouldn’t be able to afford if the worst were to happen. Next, you want liquidity, which are checking, savings and money market accounts and whatnot that you can access immediately for little emergencies or opportunities. For example, a vacation, a new car, house repairs and so on. Finally, you need a strong retirement plan and to be honest with you, the younger you start putting money into one the better off you’ll be in the end.”

“Okay, so what you’re saying is that the first thing to do is protect yourself, then save up a little, then strategically place your money and potentially earn more by doing that?”

“Yup. What you ultimately want to do is diversify your money, but it all depends on your age and your financial situation. The more you put away today, the less worrying you’ll have to do about how your stocks are performing versus your other investments, should it come to that. A great place to start investing your money is with life insurance. But everyone’s different, so I’d definitely recommend talking to someone before making any decisions.”

“Okay, so you never answered my question about the stock market. Is now a good time to be playing around in it?” I wasn’t going to let him off the hook that easily.

“If you’ve got all your other bases covered, then absolutely. I don’t think there’s a bad time to be in the stock market if you’re smart about it. There are also things like a traditional IRA, or a Roth IRA that can be key elements to your financial security. But if you’ve got other things to worry about and it would be difficult for you to recover from a loss then you’ll probably want to focus on your protection and liquidity.”

I carefully examined my wine glass as a method of hesitation before asking my next question; I was unsure of how he’d take it.

“So… one of my co-workers told me the other day that she’ll get life insurance later, when she’s more financially stable. What should I tell her?”

“The biggest problem in the life insurance and investments industry is the lack of understanding and the assumption that you can always take care of it later. But let me tell you something: by then it will be too late. To get life insurance, you go through a process by which your health is tested, and you’re rated according to the results. The younger you are, the healthier you are, and the better rates you’ll get when applying for a policy. Now is also the time to take advantage of a retirement plan; you’re nimble and can recover from stock fluctuations and housing market crashes like the one the country’s dealing with right now. Plus a lot of companies offer a matching program, where they match what you put into your retirement plan, essentially doubling your money. But young people need insurance more than anyone. Protect what you’re working so hard for and protect those who care about you. Do it while you’re young and healthy, otherwise you’ll end up paying a much higher price, or worse, be un-insurable. Your co-worker may think she’s being smart by not making another purchase, but the second something happens to her, she’ll change her mind.”

“That’s kind of harsh, don’t you think?” I snorted, sure there was another way to put it so that I wouldn’t sound like a snide ‘I told you so’ kind of person.

“Well, it’s harsh reality you’re dealing with here. You will use it; you will die, it’s a fact. But life insurance is also a great investment tool; not all life policies have to be used upon death, and many can be used prior to death. It’s one of the best investments you can make.”

“What about when you buy a house? Does life insurance have anything to do with that?”

“First of all, congratulations on making a very smart decision. The purchase of a house, if done correctly, is another of the best investments you can make. Always keep in mind the protection, not just house insurance, is important. If you’re buying a house by yourself, what burden will you leave your family if you pass away? If you’re married or have a significant other, do you want them to be able to stay in the house if you are no longer there? Do you want them to at least have the option? Those are all things to think about when you buy a home.”

“And when you have a baby?” I asked, thinking about our potentially upcoming big expense a couple years down the road.

“Always a good time to re-evaluate how much you have in your policy. Many times people think they have enough, but when they sit down and do the math on how much they spend on their mortgage, car payments, trips, school expenses, and the like, they realize they wouldn’t have enough to cover those expenses should something dire happen to them. Something I see a lot of is individuals who only have life insurance through their companies. What happens after a lay-off? The insurance is gone, too. Then what? I talk to many people who think they have enough invested in life insurance, but often times $50,000 or $100,000 policies don’t go as far as they’d think. You want to make sure you have more than enough to compensate for your annual income when choosing an amount for your policy. When you add a new bundle of joy to your family, it’s a good idea to re-evaluate what you’d like your protection to be.”

At that point I felt like telling everyone I know to go out and invest their money in life insurance. But for those of you out there who have more questions and want them answered, here’s what I would suggest: at the end of the day you should remember that finding a trustworthy financial professional is key. You need to do your research, and find out the company’s policies on things like investment products, life insurance and fixed accounts. Two reputable companies here in town are New York Life and Northwestern Mutual. They’re mutual companies, which means their ownership base is made of customers. Can’t go wrong there. Also remember the popular cliché: “Cheaper isn’t always better”. Just because one company will offer you a cheap policy doesn’t necessarily mean you’re getting the most for your money. Find out how they compare to other companies and take the time to get to know the individual you’d be working with before trusting your finances with them.

Keep in mind, your protection and retirement are the most important decisions you will ever make; even more so than who you marry, what house you buy and what job you have. Everyone’s investment needs are different, so the advice you hear from a friend or neighbor might not pertain exactly to you and yours. So talk to somebody. Might bring you peace of mind.

**Reach Financial Professional Paul Wemmer at wemmerp@ft.newyorklife.com. He's with New York Life and would be happy to sit down with you and answer your questions!