Quoted: I am looking for a life insurance policy. Term only, nothing fancy, 20 or 30 year level term is what I'd prefer.
I want $1 million in coverage. My main question is whether I should split my coverage, and go with 2 separate companies for $500k each, or go with one company for $1 million. This way, if I die and someone decides to delay the payout for some reason, I hope that my wife would get at least $500k right away.
Is this a sound way of thinking about it? Do policies ever get cancelled because a company is going under or something?
Any other tips? I've got our first baby on the way, due in August, so I'd like to get this taken care of. Also, what is "permanent life insurance"?
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I used to sell life insurance, I have a CLU designation, etc.
If you go with one company, it will probably cost slightly less (though not enough to make a huge difference) and they will want more thorough medical histories and exams. You can avoid medical exams entirely if you just buy in chunks of 100K each or less, if that is an issue for you. It will cost more if you do that, but we aren't talking huge bucks.
Policies do not get cancelled if the company goes under. Insurance companies are tightly regulated and there are state insurance pools made up of all the companies that pick up the garbage and pay everything off if one company fails. Unless there is some real question about the death (like your wife is suspected of murdering you) payoff should happen fairly quickly after the death certificate is submitted, in any case. I never heard of any cases of unreasonable delays.
Term life insurance is where you pay a premium based on the risk of you dying in the current year. It is very much like car insurance. It accumulates no cash value. If you stop paying the premium, you don't have any more coverage.
Permanent life insurance is where you pay more (a lot more) and the excess over the term premium is put into a fund that accumulates cash value that is used to pay the death benefit. Theoretically, the cash value should equal the amount of the death benefit when you get to the expected age of death. (It never works out that way, but that's the idea.) At some point you can stop paying premiums and just rely on the cash value as the death benefit.
Which is better? That is a long story but, for the typical person, with kids, just starting out in this thing, go with the term insurance first. Lots of people will tell you that the permanent insurance is a bad investment. In terms of comparing it to the return you would get from the stock market or something similar, it is a bad investment. Part of the reason is that about half of the first year's premium goes to pay commissions.
People will tell you that you will do better if you "buy term and invest the difference". Assuming all things are equal, that is probably true. The insurance agents counter that very few people actually invest the difference and that most people need it as a kind of forced savings method (even if it results in a negative return for the first ten years or so). They also say that money in insurance policies is generally more secure than money invested elsewhere. For various reasons, that is true.
While you consider these arguments, please remember that the arguments from both sides of the table were originated by insurance agents seeking to sell their particular favorite product.
There are a whole nother set of arguments about permanent insurance if you have significant wealth. It can provide various tax advantages. If you have lots and lots of money, send me 100 grand or so and I will give you more detailed advice.