Think Coverage Not Product

Geoff Cook - CFP, CHAIP

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It seems alot of people may not fully understand life insurance. Countless times I have sat down with people to review their insurance needs and their existing policies and they are lacking the appropriate insurance set up.

Unfortunetly, I think many agents in the life insurance business sell products and not solutions. Most of the time people do not really know what product they bought and why, or they are unsure of their other options.

So let me try to clear the waters for you with the following statements:

Think Money Not Insurance

Think about it this way, life insurance is money just like cars are transportation on wheels. For example, there are many different life insurance products available to the everyday consumer, just as there are many different makes and models of cars. But at the end of the day, each and every life insurance policy and model of car have the same end result. Life insurance policies pay money when someone dies and cars move you from point A to point B.

Far to often, people have the fancier and more expensive life insurance product but are missing the most important aspect...Having enough money to cover their needs.

Lets examine a situation. 

Couple: Jim and Joan (age 40 - Non smokers) 
- They have a 5 and 6 yr old child.
- Both Jim and Joan make $50,000 a year.
- $300,000 in outstanding loans (Mortgage and Credit)
- Jim and Joan can afford $80.00 a month.

A common situation I will see is the couple would have a $500,000 term-20. These people would think they have more than enough insurance, and they are happy because the policy covers the term of their mortgage.

The cost: For both of these to get a joint first to die policy as non smokers in regular health the cost would be;

- $77.85 (as of December 19th 2012)

So if either Joan or Jim were to become deceased the other spouse would recieve a tax free cheque for $500,000.

Well this policy is great right! It falls just under budget, covers debts, and leaves an extra $200,000!

WRONG. This product is offering the wrong kind of value. Sure you are guaranteeing your premium for 20 years, but the coverage is not enough.

Given this situation, what would $500,000 really do?
- Pay off $300,000 in loans.
- Put $200,000 in the bank.
- The couple would still have to also spend money on final expenses (funeral, final taxes, etc)

We have completely missed the boat on the whole reason for buying life insurance. Contrary to popular belief, it is not just to cover some debts and expenses, it is to cover future earnings. These childeren are still young, and stats show that kids dont leave the house until around age 25.


Think coverage not product


So lets look at how much coverage these people could get with a less expensive product.

For $80 a month the couple could purchase a term-10 - $935,000 coverage.

This makes more sense. Sure some might say the product isnt as "great" because the premiums arent guaranteed for as long but what really matters is the money This policy guarantees more money. Its the money that the couple would need.

I have put together an example with this couple based on three common insurance products, a term -10, term - 20, and term-100/term for life. (Dec 19th 2012) Please note there is other products available in the industry and this is just for illustration purposes.



Put it this way. I have never walked up to deliver a death benefit cheque to someone and have them ask "By the way, was that a term 10, 20 or a Whole Life insurance policy".

Life changes. We never know what could happen in a year or two or ten. Life Insurance is not set in stone and you can change your mind in the future. Pay less attention to getting the fancy product and more attention to getting the right amount of coverage.

How do I figure out how much coverage I need?

Great question, there is alot of calculators out there to help you which I will include at the bottom of this post, but lets be simple. If the average child leaves the house around age 25, multiply your income by the years it takes for your youngest child to reach age 25 and there you go, you have covered your income for the appropriate amount of time. In the future it is very easy to reduce your coverage if you desire.

To run your own life insurance needs analysis click here

We have also put together a couple posts that explain more about what you need to know about Life Insurance. The links are below;

- What Life Insurance products are available in the industry
- How do I figure out how much Life Insurance coverage i need?

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When dealing in financial matters, you are urged to consult an advisor for legal, tax or investment advice. Every effort has been made to present information in a clear, exacting manner. However neither the publisher nor the authors can be held responsible for any losses incurred due to the actions of any individual as the result of this post or any errors or omissions contained herein.

Infinite Financial places mutual fund transactions through Banwell Financial Inc. and Life Insurance transactions through Bridgeforce. To learn more about these relationships - click here

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