Ten Golden Rules in Buying Life Assurance
by Craig Lock
editor's note: This article comes to us from New Zealand. "Life Assurance" is typically called "Life Insurance" in the U.S.
Life Assurance. What a boring subject, Craig! Let's see, the following Ten Golden Rules apply to all life assurance policies:
Plan ahead carefully. Put as much effort into thinking about designing your life, as in planning your next vacation (we call it holiday, here in the old British "colonies").
Select your assurance company(or bank) offering the retirement plan very carefully. These days more and more financial institutions are merging their operations and banks are increasingly marketing life assurance products, which were once the exclusive preserve of assurance companies. Don't buy a policy from the first company to approach you. You may be committing 10% of your hard-earned income for the next 30 years and this needs careful thought.
Look closely at the projected investment returns provided by your adviser. Remember that they are illustrations only and are not guaranteed. Ask yourself, are the assumptions (the interest yield) realistic in the long term? One company's figures may be far higher than another; but they may be quoting at a far higher interest rate than the competitor. Is one policy quoting a value assuming premiums are inflation linked - the other not? This makes an immense difference to the final payout.
For example: $100 a month paid in over 30 years with an average investment yield of 6% amounts to $58293; while at 8% it will build up to $72485 - a substantial difference! Also, if you started a year earlier you will receive an extra $7200 by paying in an extra $1,200 (value $79747 at 8.0 %).
Besides your life assurance policy, ask yourself, what else does the company offer you? Some offer a full financial planning service, tax planning, wills and so on. And what of their service to you as customer?
The initial commission paid to the agent is a payment for servicing that policy over the lifetime of the plan. This payment is made up front; however bear in mind that life assurance policies normally last far longer than agents do!
Select a salesman that you can trust. This is of vital importance in buying insurance. Incidentally, the word insurance generally refers to general or short-term insurance (like house, car, boat), whereas assurance denotes long-term or life assurance.
There are two types of insurance salesman: agents and brokers: Agents can sell only for the company that employs them, while brokers can sell for all companies with which they have a contract.
My advice... It does not matter whether you choose an agent or a broker. The important thing is that you must fully trust the person and feel completely at ease with him or her. You are giving this person complete confidence as regards your personal finances, your hopes and dreams. In turn, this person should come up with an analysis of your most pressing financial needs. Then they must explain all the technical details of your policy- the solution to your financial problem. Then in the future they should provide continuing service by sorting out any problems that may occur and by regularly reviewing your assurance portfolio on an annual basis.
Never buy a policy that you cannot afford. People's circumstances change - often drastically. This is far more frequent these days with downsizing and redundancies ...and we mere mortal humans can't foresee the future. My advice: just be very careful when taking out a new policy. Let the buyer beware.
Start as early as possible. Whether you are looking for assurance against death, disability or illness, or you are saving for your retirement, it always pays to start with your policy as early as possible. The younger you are the cheaper the cost of your lifecover. In addition, young people have a wonderful opportunity to start saving early.
It's quite amazing to see the effect of compound interest on a few extra years... a huge difference at payout time (as we saw in the example mentioned previously. The "magic" of compound interest works wonders on your final pay-out!
Ensure that your premiums increase with inflation. Most life assurance companies offer the possibility of automatically increasing your premiums every year. If your company doesn't offer inflation indexing, make voluntary increases each year for as much as you can reasonably afford.
If your premiums are not increased in line with inflation, then you are effectively investing less each year (in real terms, i.e. terms of the purchasing power of your money).
Always give complete medical information.
Never surrender your policy... unless it's an absolute emergency and you need the cash value of your policy desperately (but remember, you always lose out on surrendering a life policy).
Choose your investment fund carefully. Give some careful thought to it. What is your investment philosophy and aim? Do you want to be conservative, or are you willing to "take a punt"? Are you looking for a "high investment yield", or a "safer" return. It's always a "trade-off" between risk and return.
Strive for balance in your choice of investment fund.
Always remember that Life Assurance is a LONGTERM investment. It is not designed to work like a bank account- to draw out money whenever needed. Cancel early and you will lose money. ... And don't draw on your policy unless it is absolutely necessary.
And finally, review your life insurance regularly.
Here are a few words to end off. A visit to your financial adviser is like having your car serviced; it doesn't necessarily have to be like a visit to the dentist - Ouch (my friend Andy is not like that though)!
Craig has been involved in the personal finance field for many years before becoming an author and has studied and written extensively on money matters: articles, brochures for financial institutions and books.