Q. What’s the best way to pick an insurance policy? If the premiums are about the same and the company has the same high rating, what else should I look at?
— In need
A. You ask a very broad question, but there are some basics to know before you buy any kind of insurance.
Whether it’s life insurance, health insurance, or coverage for disability, homeowners, auto or long-term care, it is important to first assess the need.
Ask yourself: Why do you need the insurance? How much do you need? For what period of time do you need the insurance? What is the most cost effective way to pay for it?
Let’s take life insurance as an example.
The easiest way to determine the need is to take yourself “out of the picture” as of yesterday, said Altair Gobo, a certified financial planner with U.S. Financial Services in Fairfield.
“Besides the emotional loss of a loved one, what would your family’s financial picture look like?” Gobo said. “This can be analyzed by examining your cash flow – with and without you – and your expenses, and determine if there would be a shortfall.”
As with most insurances, Gobo said, you want the benefit to be there the day you need it. In this case, that’s the day you die.
“Since we don’t know the answer to that question we usually want the death benefit to be there for a long period of time – let’s say to age 100 or more,” he said.
One could also need life insurance not for family, but for business, such as for a buy/sell agreement, Key Man, or other such reason. In that case, the need may not be “forever,” but for a shorter period, Gobo said.
Assuming you and/or your advisor have done this analysis, you want to compare insurance company ratings, premiums and guarantees, and of course, the contract, Gobo said. You want to make sure you are comparing like–kind benefits.
When all is said and done, Gobo said, it very often comes down to cost.
“I once believed that most people did not like insurance. But after many years in the financial planning business I have come to believe that it’s not that we don’t like insurance – we just don’t like paying for it,” he said. “After all, if you were offered $1 million of insurance for free, would you take it?”
Gobo said once your budget is determined and you’re satisfied with the insurance company ratings, you may want to examine how the insurance company is managing its own money, such as the rate of return on its investment portfolio, the quality and consistency of that return and its claims-paying ability.
You want to make sure the company is still there if you ever need to collect the benefits you’ve been paying for.
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