Life insurance agents are trained to sell you add-ons to your policy. It’s a lot like a fast food attendant asking you if you want to “supersize” your meal, or if you want fries and a coke with your order. The problem with life insurance add-ons, like fast food extras, is that it’s mostly empty calories. In the case of life insurance, it’s deadly to your wealth instead of your health.

The two main add-on options are the Disability Premium Waiver and the Accidental Death Benefit rider. The purpose of the Disability Premium Waiver is to exempt you from having to pay your insurance premiums if you become permanently disabled. The purpose of the Accidental Death Benefit rider, also known as a “double indemnity clause” is to pay your beneficiary twice the death benefit amount if you die as the result of an accident. Both add-ons seem reasonable and necessary, until you consider the odds of actually needing them and the additional costs to having them.

If you are concerned about becoming disabled during the life of your policy, the Disability Premium Waiver may not be the most cost effective way to protect life insurance premium payments. The cost is simply too much for what you are trying to accomplish. Contributing those extra dollars to a general disability policy would be the best choice to pay all your expenses, including your life insurance premiums. Furthermore, if you purchase the lowest cost term policy for an adequate coverage amount, your premiums will not be a major cost.

An Accidental Death Benefit (ADB) rider could actually cost you more than if you purchased a policy for twice the coverage. For example, let’s assume a 35-year-old male could purchase a $300,000 ten year term policy for $119 per year. Let’s further assume that an ADB rider costs only $.75 per $1000 of coverage. To have the accidental death benefit rider in that scenario he would need to pay an additional $225 per year in premiums bringing the cost of this hypothetical policy to $344 per year.

Instead of spending the extra money on the ADB rider, he could have purchased twice the benefit ($600,000 worth of coverage) for a total premium of only $188 per year. In both cases, if he died accidentally his beneficiary would receive the same amount, but by eliminating the ADB rider to achieve the same benefit amount he saved an extra $156 per year.

Obviously an ADB writer is not a good value. But you will have to run the numbers for yourself to make that determination. If your agent offers you the ADB rider, ask him the cost per $1000 of coverage. Then do the math. Compare the results with a policy for twice the death benefit amount to see if it’s a good deal or not. Is it really just “a few dollars more,” as the agent will tell you?

Once you have established that you need life insurance coverage, the next step is to determine how much your death benefit should be. The higher the amount of the death benefit, the higher the premium you will pay. To get an adequate amount of coverage at the best possible price, you want to estimate your death benefit needs based on a sensible criteria.

Depending on who you ask, the methods for determining the appropriate death benefit vary. Usually it is recommended that the yearly income seeking to be replaced is multiplied by a factor. Some recommend 8-10 times the amount of yearly income required to replace the income of the insured. Others recommend that you choose an amount that if invested conservatively would provide a continual income for as long as it is needed.

As an example, let’s assume that you contribute $50,000.00 per year in income or services to your household. If you were to die, let us further assume it would take approximately $50,000.00 per year to compensate for the financial hardship your loss creates. Deciding on the correct amount of coverage for that situation would require you deciding how many years after your death your lost contribution would need to continue.

If we assume that the financial hardship created by your loss would only last 10 years after your death, then you would multiply $50,000.00 by 10 to arrive $500,000.00 as an adequate death benefit. In a situation where the financial hardship would last for the life of the beneficiary, a death benefit amount should be selected that if invested at a conservative rate of interest would yield a yearly return of $50,000.00. For example, a $500,000.00 death benefit invested at 10% would yield $50,000.00 per year.

I don’t know about you, but I have spent an evening with a life insurance salesman, and I have to agree with Woody. The salesman pitched me a bewildering number of choices to part me from my hard earned money, and talked and talked. That was several years before I became a life insurance agent and learned the tricks of the trade, before I knew the strategy of only buying the least expensive term life insurance policy from a company rated “A” or better.

There are numerous variations of life insurance policies, but they all fall into two basic categories: term life insurance and cash value life insurance. Cash value life insurance comes in several flavors: whole life, universal life, variable life, and variable universal life.

While cash value policies can be used to achieve multiple goals in your financial plan, the problem is that they don’t do it well. And one could achieve similar goals more effectively and profitably with better investments. That’s because cash value life insurance is not a good investment vehicle, and it should never be considered as an investment. For that reason, the best value is a term life policy. It’s pure protection at a reasonable price.

Choosing a term life insurance policy is simple. Once you decide on the death benefit amount that you need, and the length of time that you want coverage, choose the policy with the lowest premium from a company that is rated “A” or better. The ratings are given by insurance-rating companies, and are meant to give you some idea of the financial soundness of the insurance company you are considering. A rating of “A” or better is an indication that the insurance company is financially strong.

Change happens. Children are born. Investments grow. People get older, and hopefully wealthier. The list of potential lifestyle-altering changes that can occur for any person or family is virtually endless. As you must adapt to the changes in your life, so must your life insurance plan adapt to those changes.

By reviewing your life insurance plan every three to five years, or as needed, you can redesign your plan to suit your current situation. Doing that could potentially save you money and heartache in the long run. If you become more financially independent as you get older, or if your financial responsibilities to others diminish, you can lower or eliminate your life insurance coverage and use the saved premium payments for investing or enjoying life. If you are not financially independent yet, and your financial responsibilities increase, you may need to increase your life insurance coverage so that you don’t leave those you care about with a financial hardship after your death.

A trust is a legal document that establishes a relationship in which one person (trustor) transfers an asset to another person (trustee) who manages and controls the asset for the benefit of a third person (beneficiary). A life insurance trust is a trust relationship established specifically to own a life insurance policy. Having a life insurance trust could potentially benefit your life insurance plan, and ultimately your heirs. It fact, not having one could be a mistake that leaves an irresponsible beneficiary broke and penniless.

By having your life insurance trust as the owner and beneficiary of the policy you could create several potential advantages. First, you can better insure that your lost income is replaced and continues for as long as it needs to–the main goal of life insurance. Second, you can insure that the life insurance proceeds are invested according to your instructions. Third, as I eluded to above, you can prevent the life insurance proceeds from being paid in a lump sum, only to be squandered by financially irresponsible beneficiaries in a short time. Fourth, you potentially remove the life insurance proceeds from your estate, avoiding probate and estate taxes. Depending on your unique situation, thousands of dollars could potentially be saved by implementing this strategy.

A word of warning: if for some reason you decide to purchase a cash value type life insurance policy, DO NOT put it into a life insurance trust. Because a life insurance trust is irrevocable, you will not be able to borrow your cash value from those policies. However, if you follow the strategy of only buying term life insurance, you can get around the irrevocability issue. To effectively “revoke” an irrevocable life insurance trust connected to the term policy, you just stop paying the premiums.

If you feel that establishing a life insurance trust may be the right strategy for your life insurance plan, consult with with your financial advisor and an attorney knowledgeable in trusts.

Life insurance salesman will often quote you the lowest rate in order to get you to complete an application with them. One agent may accurately quote you a standard rate for the same insurance company that another agent quoted you a preferred plus rate just to get you to complete the application. Your actual rate will be based on the underwriting criteria of the life insurance company you choose regardless of what any agent quotes you.

You cannot get a lower cost term life insurance policy from the same company by pitting two or more agents against each other. Each company has set rates based on their underwriting criteria. If two agents quote you different rates for the same amount and term of coverage from the same life insurance company, it’s because one of them is not properly qualifying you for the appropriate rate. You may be tempted to go with the lower rate, but you might complete an application only to find out later that you’ve wasted your time.

When I got my first life insurance policy that happened to me. My agent quoted me a preferred rate that sounded appealing to get me to complete an application with her, but after submitting my application the underwriter at the life insurance company offered me a standard rate that was substantially higher. Not knowing the strategies I know today, I foolishly lowered the coverage amount and shortened the policy term to get the monthly payment lower.

Different agents represent different life insurance companies, and some agents are better (honest) at qualifying you for an accurate rate. To get the best rate on your life insurance policy, get several agents to provide you with quotes accurately based on the underwriting criteria of the companies they represent. You want to choose from the lowest *accurate* rates you can find, not the lowest rates you may not qualify to receive.

I received the standard rate on my life insurance policy simply because my father had a heart attack before the age of 50. It didn’t matter that I was perfectly healthy! However, if I had used this strategy I would have found another agent that would have shown me another top-rated company willing to offer me a preferred rate because my father was still alive, which could have saved me hundreds of dollars and allowed me to purchase more protection for my family.

Whole life insurance is a type of life insurance policy that is marketed as an investment or “forced savings” plan. The claimed benefit of a whole life policy is that it builds cash value, which is the investment or savings part of the policy. When compared to other ways you could invest your money, a whole life insurance policy is simply not a good investment.

Some people falsely believe that their beneficiary will receive both the cash value and the death benefit if they die. However, when you die, your beneficiary will receive whichever is greater, either the policy death benefit or the accrued cash value. As an example, let’s assume you purchased a $50,000 whole life policy and at the time of your death the cash value had grown to $30,000. Your beneficiary would receive only $50,000 upon your death, not $80,000. In that example, at least $30,000 of the death benefit paid came out of your pocket, more if you factor in the portion of the premiums that didn’t accrue as cash value. Sound like a good deal? It is for the insurance company because it only has to pay $20,000 or less to your beneficiary.

“But you can borrow the cash value,” the life insurance salesman will tell you. Most people never do that, and when they do, they have the privilege of paying interest on their own money. Further, whatever has been borrowed and not repaid when the insured dies is deducted from the death benefit that’s paid out. Using our example above, if you had borrowed the $30,000 in cash value from your whole life policy, and had not repaid it before your death, your beneficiary would only receive $20,000.

What about the interest rate you can earn? You can get a better interest rate elsewhere. And as for the life insurance sales pitch that you can borrow the cash value tax-free, you can borrow any money from any source tax-free. Before you throw thousands of dollars away on whole life insurance premiums, consider the many other ways you could better save or invest that are not connected to a life insurance policy.

The best value for the lowest cost is a level premium term life insurance policy. This type of policy will allow you to purchase an amount of coverage at a fixed premium for 5, 10, 15, 20 or 30 years (the term). The greater the term, the greater the risk for the insurance company; therefore, the greater the term, the higher the premium.

Select the shortest term that provides adequate coverage, thereby saving hundreds of dollars in premiums that would otherwise be potentially wasted on an unnecessarily long term.

How do you decide the best term? That depends on your unique situation.

For example, let’s assume that you are a 32 year old male in excellent health and able to purchase $500,000.00 of coverage for 10 years at $13.56 per month, for 20 years at $20.56 per month, and for 30 years at $36.31 per month. Two factors to consider in choosing the best term in that situation would be present affordability, and future needs.

* Present Affordability – If paying $36.31 per month for a 30 year term is going to be difficult on your budget, but you have determined that $500,000.00 of coverage is the minimum that you require, choosing a ten year term for $13.56 might be your best choice to keep a policy affordable without lowering the death benefit amount to get a longer term.

* Future Needs – It is difficult, if not impossible, to predict the future. However, it is reasonable to predict that dependent children may become less dependent one day, that dependent parents will eventually die, and hopefully that one’s wealth will increase. Those factors reduce the potential for financial hardship on others if you die, thus decrease your need for life insurance coverage over time. Will you need $500,000.00 worth of coverage 20-30 years from now?

Consider that if you stop making payments after 10 years on the 30 year term at $36.31 per month due to affordability or changing needs, and your policy lapses, you would have wasted $2,730.00 in premium payments over the 10 years you paid by using a 30 year term to accomplish what you could have accomplished by starting with a 10 year term.

Do you want life insurance, or do you need it? That is a reasonable question you should ask yourself, and it is an essential question to answer, especially if you are trying to build your wealth on a limited budget. Spending thousands of dollars on unnecessary life insurance coverage can be detrimental to your wealth. It is estimated that as much as 30% of all life insurance policies are on the lives of single people with no dependents. Those people probably have no need for the insurance they are paying for.

The purpose of life insurance is to prevent a financial hardship that would be created if the insured person dies. Therefore, if your untimely death would create a financial hardship for another, be it a spouse, your children, or a dependent parent you need life insurance. If no hardship would be created for another by your death, you do not need life insurance, and your money would be better used to build your wealth now.

An important consideration when formulating your life insurance plan is to factor in the potential financial hardship that would be created by a loss of the services the insured person provides now. While a non-working spouse may not contribute a paycheck, replacing their service–child care, for example–could create a financial hardship on the surviving spouse.

It may sound obvious that you should create a life insurance plan, but it would surprise you how many people enter the life insurance buying process without a plan. Failing to create an adequate life insurance plan can cost you.

For example, if you are sold a policy with a $1,000,000.00 death benefit when a carefully thought out life insurance plan would have revealed that you only needed $500,000.00 of coverage, you would have spent significantly more than needed for adequate protection. That is money wasted on premiums that could have been used to invest, or used to enjoy your life now.

Another potential consequence of failing to plan is that, in the event of your untimely death, the proceeds from the policy could end up in probate court or end up being squandered away by beneficiaries unskilled in money matters–both costly symptoms of inadequate planning.

How do you create a life insurance plan? It’s not hard, but you will need to answer several questions, determine your needs based on the answers, and write it all down. Here are the basic questions you need to answer:

1. Do I need life insurance?
2. How much coverage is needed?
3. How long will the coverage be needed?
4. What kind of life insurance policy is needed?
5. Who should benefit from the policy?

To adequately answer the questions, you can apply the buying strategies I share with you in this blog to your own situation. How you answer each question will affect what you pay in premiums and ultimately how successful your life insurance plan will be at meeting your goals.