Personal Finance: More on Life Insurance

There are a few remaining questions I wanted to answer with regards to life insurance. I don't want to get into the whole term versus cash value life insurance debate at this time (I'll save that for next week). There are situations where cash value insurance can be useful, but typically you are better off with term insurance.

How do I purchase life insurance?
You can purchase coverage over the internet or through a life insurance agent. Insweb is one site that I have heard of, but there are many different providers out there. It is extremely important to select a company that will pay your claims. I would go with a company that has been around for some time (20 years or more) and is rated A (preferably better) by the rating agencies. Unlike much of the debt that was rated shadily by the agencies that has caused our current fiscal crisis, the ratings agencies actually do a pretty good job with life insurance companies because these type of companies have been around forever and are easy to understand.

How do life insurance agents get paid?
Agents work on a commission that is dependent upon the annual premium you pay for the policy. Most of your first year premium is actually going directly as compensation. For instance, if you buy a 20 year term policy for $1000 annually, the agent will get somewhere between 50%-90% of that premium as a first year commission. If you keep the policy in force for more than 1 year, the agent will usually get trailing commission of around 5%-20%. The actual percentage is going to depend upon the pay structure of the company the agent is working for.

Additionally, compensation for cash value life insurance is typically higher than term insurance. For example, for a $1000 annual premium policy, an agent may be paid $700 for a term policy and $800 for a cash value policy. This is not always the case, but it is typically what I have seen.

I will get more into the differences between cash value and term insurance in my next personal finance post. If you would like any particular questions answered as well, I will try to cover them in that post.