The Right Life Insurance Policy for You

If you like getting the hard sell from casual acquaintances, distant relatives, old college buddies or parents of your kid’s Little League teammates, here’s some good news: the life insurance industry is building up its sales force.

The Wall Street Journal says many big insurers are adding thousands of agents to pitch investment-style insurance products to customers disenchanted with the stock market.

At one point or another, life insurance is an essential product for just about anyone with a spouse or children. But the market is a minefield, littered with products that are all but impossible to understand. So what’s the best way to tackle it?

First is to decide on your main goal. If you have young children and want to be sure there will be enough money to get them through college if something happens to you, then a simple term policy may be the best choice.

Many term policies offer $250,000 to $500,000 of coverage for a premium of $1,000 to $2,000 a year. If you don’t die within the term, typically 10 or 20 years, your beneficiaries collect nothing. But term is ideal if you believe that after the coverage period ends you’ll have plenty of other assets to keep the family going. It’s easy to shop online and compare one policy to another. Look for a term policy in the BankingMyWay.com Insurance Center.

There also are numerous types of “permanent” insurance that will cover you for life. Different types, such as “whole” and “universal” offer various options, but most have an investment component.

Initially, premiums may be several times higher than a term policy would charge for the same death benefit. But, over time, investment gains can be used to pay the premiums. Permanent policies typically build up value, or equity, that you can draw on in retirement, or take as cash if you cancel the policy.

While permanent policies can suit people who really need lifetime coverage, these policies are so complex and varied it’s difficult to make apples-to-apples comparisons.

Many experts argue that most people are better off getting low-cost term policies and putting the money saved on premiums into more straightforward investments like mutual funds, where the apples-to-apples comparison is easy. This also provides more flexibility, as you can choose among thousands of funds, not just a handful offered by a life insurance firm.

Shopping for a permanent policy generally involves dealing with an agent who earns a commission on the sale, a conflict of interest that can taint the agent’s advice. You could get advice from a fee-only financial adviser, who is paid a flat or hourly rate and has no stake in your decision, but this might be pretty expensive unless it is part of a broader financial plan covering your investments, tax issues and estate planning.

With any permanent-life policy, ask the agent for clear data on the investment component’s track record, and then compare that to a comparable set of low-fee mutual funds. If the agent cannot comply, consider it a red flag.

Also, be sure to find out which elements of the policy are guaranteed and which are not. Is there a chance your premium could go up rather than down? How much “cash value” can you get back if you cancel the policy? How long would you have to continue paying premiums under the worst case?

Shopping for insurance can be mind-numbing, but it doesn’t have to be if you stick to term policies. So, with every permanent policy the agent pitches, ask: “Why wouldn’t I do better buying a term policy and investing separately?”