Figuring out and obtaining enough life insurance is a task that is easy to put off, forget about or wrongly assume that you have enough of it.
Steve and I knew that we didn’t have enough. We took action and worked with a financial advisor to understand what we would likely need and were given quotes for different types of coverage. We completed our applications and only had our blood tests and physicals left to do.
Then, life got in the way. The applications proceeded to the bottom of the pile on our desk, which is equivalent to a black hole. We never got it done. Then Steve died.
Knowing that we did not have the coverage that we needed added A LOT of financial stress to an already extremely emotional and overwhelming time. When you add the surprise beneficiary issues I ran into, it made the worst time in my life even tougher.
Life insurance was one of many things I relied on Steve to handle. I trusted him implicitly, so when he said what we needed I agreed. After he died, I needed to learn a lot of things. One of my priorities was to learn more about life insurance.
Combing through my life insurance policies and adding additional coverage was a very high priority for me. I had to make sure that my girls would be financially okay if anything ever happened to me. Here is what I learned (the hard way) about the different types of life insurance that are out there.
I am NOT a financial advisor, so before you decide what you need please pursue professional advice.
Term Life Insurance
Term life policies provide life insurance protection for a specific period of time. If you live past the end of the term, the policy simply terminates unless it is renewed. Renewal at that point tends to be extremely expensive.
With guaranteed level term insurance both the premium and the amount of coverage (death benefit) remain level for a set period of time, i.e. 10, 15 or 20 years are all very common. Many policies are also convertible to permanent coverage for a portion or all of the term.
You can also secure group term insurance through your employer benefits (provided you have them). Typically these are not portable, so if you leave your job (or your job leaves you), you no longer have coverage. Usually it makes the most sense to have some sort of individual life insurance.
Permanent Life Insurance
Permanent insurance policies provide protection for your entire life as long as you pay the premium to keep the policy in force. With a permanent policy, a portion of each payment goes to the cost of insurance and a portion goes into a savings or investment account that can build over time.
This cash value grows tax-deferred as long as the policy is in force (and you follow the rules). If you cancel the policy before you die, you will receive the cash value in the account (minus any surrender charges), but may be subject to taxation (depending on your cost basis).
There are other definitions that are used to represent different types of permanent life insurance.
- Whole life enables a person to make equal payments for their life or as long as they want the policy in effect. The death benefit and cash value are predetermined and guaranteed. Gerber life is a good example of this.
- Universal life allows policyholders to pay premiums at any time, in any amount (within set limits), as long as the policy expenses and the insurance costs are met. The amount of insurance coverage can be changed and the cash value will grow at a predetermined interest rate. The interest rate may vary over the length of the policy, but there is usually a guaranteed minimum.
- Variable life also enables a person to pay a level premium for their life. The difference between this type of policy and the whole life policy is that the death benefit and cash value will fluctuate depending o the performance of investments. This policy has sub-accounts which are similar to mutual funds. Another way to think of this money is a pool of investor funds professionally managed. The policy owner has the ability to select the sub-accounts in which their money is invested (from the available list) to coincide with their individual risk tolerance.
- Variable universal life is a combination of universal and variable life insurance. A person can pay premiums at any time and amount (within limits) as long as the costs are covered. The amount of the insurance coverage can be changed and the cash value goes up or down based on investment performance in the sub-accounts.
My Experience Filing Claims
Some insurance companies give policy holders the option for “extras” such as accident, cancer, or long term disability coverage. Generally speaking (and depending on the cost) they may be worth it. I say “may” because of the experience I had. Steve had three different policies through three different companies.
One company (Aflac) refused to pay out the policy because of their long list of exclusions. The second company (MetLife) paid out the entire amount only to request half of it back – apparently due to a policy change that no one could find documented. PLEASE hang on to your actual insurance policy and any policy changes, especially those with your signature on it.
I fought this one and asked them to produce the copy that showed the new exclusions (I apparently had the “old” policy which did not list the contested exclusion) and they never produced it. They eventually turned it into collections and threatened court all without ever producing the proof – how awful is that?
The cost of fighting it coupled with the fact that I was fighting to survive each day forced me to return half the money without having the simple courtesy of seeing Steve’s signature accepting a change.
The third company (Dakota Capital Life) is a private life insurance fund and they paid the whole amount. I was beyond grateful to this organization for not trying to get out of what they owed.
Do Your Homework
Read the exclusions in each policy and determine if the exclusions are so far reaching and vague that they will exclude any “likely” cause of death for you. Compare the exclusions to your normal activities. Some companies are great – while others seem to be there to collect money, but never pay.
There are a ton of options out there – don’t let the extensive list keep you from taking action. Life insurance is an investment, whether you buy a term or a permanent contract. We all hope it is something that ultimately isn’t needed due to a premature death.
Remember, the policy isn’t for you – it is for those that you leave behind. The small cost is absolutely worth it.
What I Did
Again – I am not a financial advisor! I opted for a 30 year term life insurance policy. My reasoning was this – in 30 years I will not have a mortgage. My children will be out of college and I will have enough cash saved in my retirement accounts to cover all of my final expenses and any debts I may have at that time.
The primary goal of my life insurance is to ensure my children are taken care of if God forbid something happened to me. As adults, I fully expect them to be capable of paying all of their own bills. The 30 year term policy was really affordable, it can be cancelled when/if it is no longer needed and my rate is locked in until I am 59, which is great!
The policy is not tied to an employer – it is my own personal policy. Having this coverage means I do not need to rely on an employer to provide it and it can’t change as benefit packages change.
I also have a second life insurance policy through my employer. This policy allows me to have 8X my annual salary, up to a specified amount. I chose the max, so as my annual salary increases (hopefully!), so does my coverage until I hit the limit.
This policy also allowed me to have up to $10,000 of coverage on each of my children. I chose to include that coverage since I know too well that unexpected nightmares do happen.
The total cost of Steve’s funeral, cremation and headstone well surpassed $10,000. Death is expensive – please make sure you have some coverage for those left behind. I hope that by me sharing my journey full of challenges, that you’ll do things differently while you still have time.
When’s the last time you looked at your coverage? Do you know where your policies physically are?