This is post was written by Ike Devji, a Phoenix, AZ-based asset protection attorney and one of my oldest online friends. I have spoken with Ike many times for advice on client-related issues and had the pleasure of meeting him in person a couple of years ago when he spoke to my financial advisor study group during a meeting we held in Phoenix. Here Ike offers some practical advice to anyone who is considering buying life insurance.
Knowing the right questions to ask before buying life insurance is a key issue for consumers, especially considering the significant investment often involved and the exit costs involved in buying the wrong policy.
Covering all the options and nuances available in the life insurance marketplace in anything less than book form is nearly impossible. Here are 5 questions to ask before buying life insurance.
What is my annual premium and can it change?
This is the amount the insurance will cost you every year. In some cases the premium is fixed and in other cases it can change based on variety of factors such as the performance of the stock market and other indices. Make sure you understand your obligations before buying life insurance. What you will lose or be left with if you don’t make what the policy expected and what was actually illustrated?
What does the policy illustration tell me?
I see lots of bold promises and spit-ball estimations of future performance made by insurance agents. The policy illustration is all that matters, so any conversation about what could happen if the policy exceeds the expectation that the illustration creates is moot; don’t engage in it and instead ask about the “minimum guarantees” if one exists at all. That’s the minimum you’ll earn in the policy if the worst happens. Remember, the column on the far right in most illustrations is the “perfect world” scenario, so look at and have the others explained as well. Be sure to challenge all assumptions made in the policy illustration, as the saying goes if it sounds too good to be true it just might be.
Does this policy have a cash value?
The cash value is the amount of premium that builds up inside the policy and that may be available to the policy owner in the future. Some policies, like term insurance, have no cash value, while others have it immediately and some build it up over time. Be clear if yours does and exactly when it will be available if you need it and under what terms.
Roger’s comment: Note that term insurance may be the appropriate vehicle for your needs. Every situation is different; make sure that you are clear as to your reasons for buying the policy. Life insurance is often a poor performing, high cost investment or retirement savings vehicle. It may behoove you to pay only for the death benefit that you need and use more traditional investment vehicles for your investing and retirement savings needs.
Is my policy protected from creditors?
Know what the laws in your state of residence are and if your policy and both the cash value and “death benefit” (dollar amount paid upon your death) is protected by law or not. Asset protection of liquid assets is always a key focus of my concern. If the law is not in your favor, some simple trust planning can often protect your policy from both estate taxes and more active threats.
How long will my policies last, what is my exit strategy?
Again, this goes back to the illustration and specifies how long the coverage will be in place at a specific cost and what the death benefit will be through the term of the illustration. In some cases, keeping the policy alive may have significant increased costs while in others you may be able to reduce the death benefit to keep the premiums level or to stretch the policy for a longer period of years. Find out how flexible your policy will be in the future and weigh that as part of your risk-and-liquidity analysis.
Find out what happens if you can’t or don’t want to continue to make premium payments. With term insurance you usually lose what you paid; that’s OK, think of it the way you might car insurance. Other policies that were structured to have a future cash value or that have a current cash value early on however may have significant “surrender penalties.” Know what happens if you walk away and what options the policy may provide, including the specific surrender penalties that may be imposed in the policy. Do you have a need for life insurance in retirement for example? The carrier could, for instance, keep all the cash value you built up if you don’t keep it for a minimum number of years.
This list just scratches the surface and is deceptively simple. Our goal here was to introduce some of the key concepts and questions you must be familiar with, so you can do your own due diligence when buying life insurance, whether a simple term policy or a complex premium-financed strategy with a triple-reverse galactic split dollar that includes a trip to the Bahamas to read the policy.
Roger’s comment: Life insurance is a versatile and often complex financial tool that can have uses in estate planning, asset protection, as a business succession tool, and it can provide a death benefit to your family. Make sure you fully understand why you are buying life insurance, don’t just succumb to a slick sales pitch.
Attorney Ike Devji has a decade of practice devoted exclusively to Asset Protection and Wealth Preservation planning. He works with a national client base including 1000’s of physicians and business owners often through their local attorney, CPA or financial advisor. Together, he and his associates protect billions of dollars in personal assets for these clients. Ike also regularly writes, teaches and speaks on these issues to executives, physicians and other professionals nationally. See his work in WORTH, Advisor Today, Physician’s Practice and at www.ProAssetProtection.Com.
As always, the information presented here is general and educational and can never replace the advice of experienced counsel specific to your assets or situation.
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