What Difference Does My Policy Selection Really Make?

Many families are surprised to discover on a product as simple as life insurance, the price among retailers for the same product can vary by 4000%. That's not a typo, a forty fold increase is possible. We have seen it. One person pays $.75 per thousand dollars of coverage per year. Another person in the same state of health and the same age pays $30 plus per thousand dollars of coverage per year. This could only happen in the insurance industry. Can you imagine a grocer selling ground chuck for 40X the value of ground beef? Who would ever pay such a premium?

It is not unusual for a thirty year old in good health to find different companies, one of which will sell him a fifty thousand dollar death benefit for three hundred dollars, and another who will sell the same man $250,000 of coverage for the same three hundred dollars. It then becomes the purchaser's responsibility to sort through the maze of fine print and promises, future benefits, and find the best product for the money spent. This is a tough assignment. There are a few general principles and guidelines that will help us in the process. Principle l. All types of coverage have a wholesale price and a retail price. It is always possible to find a company with less requirement for mark-up than their competition selling the exact same coverage for twenty, thirty, even 40% less. Therefore the Wise Consumer will shop the market and make sure they are comparing apples to apples. Principle 2. All insurance is quoted at different deductible rate structures. Even life insurance begins to reduce cost based on the amount of insurance purchased or the type of risk being insured. Most notably, in casualty, and health, and general liability insurance, whenever you raise the deductible absorbing more of the risk, you lower the price. First dollar coverage is always more expensive because there is more risk for the insurance company. A wise purchaser realizes that the first dollar coverage is not the real reason for insurance, but rather the insuring of their exposure to catastrophic loss is critical. Anyone can absorb a few thousand dollars of risk, but not a potential loss of lifetime earnings to illness or a lawsuit. Example: Ray and Susan Smith are self employed owning their own business. They have been paying nearly $630 monthly for health coverage in spite of the fact that they are almost never sick, beyond child bearing years, and in good health. A little investigation reveals they can obtain a policy with a $5000 per year deductible for less than $230 per month, saving annually some $4800. They elect to deposit the savings in an IRA feeling they could get to the money if they needed it, and pocketing the additional tax savings of nearly $1600. The real cost after tax saving considerations of their coverage is now less than $130 monthly. By absorbing some of the first dollar risk, they will within two years have save an amount in excess of their annual risk exposure. Principle 3. Insurance is a tool. It is not an investment tool. It is a risk tool. When the risk no longer exists, the tool is generally no longer needed. Your insurance professional can explain the tax advantaged benefits of certain hybrid policies that allow tax free accumulation that may be utilized to pay your premiums on your coverage, but if you purchase these policies, do so with your eyes wide open, and know your actual cost of the insurance portion. The Life Insurance lobby has been extremely effective at negotiating favorable tax laws for some of their product offerings. These hybrid type policies frequently make good tax sense. When considering life insurance:

1. Life insurance as an example, should be acquired in rather large amounts when a family is young with lots of responsibilities and reduced or eliminated in old age when there is virtually no risk except that of a potential inheritance tax or a need for liquidity at death.
2. Even these issues, in most cases, can be more fairly dealt with by legal and tax professionals as opposed to the utilization of insurance products.

The moral of the story is: Think about why you are doing what you are doing. Principle 4. Before you buy do a "needs assessment" based on the real risk. It will be true that no one should be without insurance. Poor people cannot afford to address their own risk and wealthy people realize that spreading their risk over insurance company policy holders and insurance reserves is an investment in protecting their wealth. We must be prudent in the acquisition. Examine each policy to see if:

It is necessary.
If it can be purchased for less.
If a deductible can be raised.
If a different policy might prevent overlap of coverage. Principle 5. Seek professional counsel. There are professionals that have given their life to the practice of helping others meet their risk. The have been to school, seminars, through licensing exams, and often have acquired professional designations that demonstrate they have a base of professional knowledge. Certified Life Underwriters, and Chartered Financial Planners, and other certified specialists have made this issue of helping you address your risk their vocation. You wouldn't take out your own appendix. Don't trust your knowledge in this vital area. Have your professionals explain the pros and cons of each policy and each strategy. Principle 6. Whatever you do, if you are intent on replacing all, or some portion of your current coverage, do not cancel insurance you have in place to address a current risk until the new replacement policy is "in place", bound, issued, and you are holding it in your hand. You may have to pay a few extra premiums on the old strategy while you wait. So what? That is just the cost of doing business and maintaining your response to your risk is just good stewardship. Next Article: Looking at your health risks.

Adapted from I MUST PROSPER Tutorial
Donald Clark, Chrysalis Consulting, Inc.

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