;
Term Life Insurance is the bargain-baby of Financial and Estate Planning tools.
For a very small cost, an instant estate can be created which once again confirms that, "There is nothing quite like Life Insurance".
Life
Insurance 101
How Much Do I Need?
What
About Poor Health?
Top 10 Causes
of Death
What's Your Life
Expectancy?
click below
In General:
Life insurance is a simple concept, as well as a simple product to buy. That of course assumes that you are in good health. I find life insurance in general to be one of the more intelligent ways to eliminate financial risk. If you have seen a surviving family become poor in less than a year after the death of an income earner, then you know what I am talking about. Life insurance provides the dollars needed to survive at exactly the time they are needed. And you will never pay more into a life insurance policy than your beneficiaries receive from the policy at their time of need. I really don’t like to talk about the different types of life insurance contracts unless I am speaking to someone in person. If you already know the type of insurance you want, then I am boring you. And if you know nothing about life insurance, you should talk with a financial planner or insurance agent about the different types and which is best for you.
You came here for a Free Instant Term Life Insurance Quote, so go ahead and get your quotes. Or you can continue to read on for more information on life insurance.
Term Life Insurance:
When buying Term Life Insurance, you buy a certain amount of life insurance for a specified period, or “term”, and at your death, a check is written out to your beneficiary(s). Your premium payments are broken into two parts; most of the money you pay for your coverage goes toward the cost of the protection or the “death benefit”, while a small portion goes to pay policy fees. Most every policy has an ongoing policy fee to cover the cost of doing business, paying commissions, sending out bills, answering phones, etc. And by the way, you don’t save any money by not using a live insurance agent when you purchase your policy. If anything, you will need that agent from time to time for service and questions. Good insurance agents more than earn their commissions!
So that’s how simple life insurance can be to understand...you pay now so that the insurance company pays at a future time of need. Term life insurance has never been less expensive, and you can lock in the rates for up to 30 years. That means that a young man of 45 years old, like myself, could purchase a policy today and pay the same rate for the next 30 years...until age 74! For most of us, that would be a sufficient amount of time to be insured. After all, who will suffer a financial loss because of our death at that age?
If you have the good fortune of being worth millions of dollars at that age, you could justify the need for life insurance to help pay your estate taxes so your heirs wouldn’t have it taken out of their inheritances. But realistically, most of us will spend most of our money before that age, or set up trust to facilitate the efficient distribution of our wealth. Aside from the rare cases like our last example with the millionaire, I must honestly say this, “ My concern is that no husband, wife, or child(ren) suffer financially after the death of a loved one, because of poor financial planning. There is no way to know when a tragedy is going to happen in a family, but there is a way to plan for the financial struggles that will follow.” I have seen families lose everything, including the lifestyle they were accustomed to, because a decision maker either decided not to buy life insurance, or purchased too little.
Don’t get stuck on the types of life insurance. Find out how much protection you need, then find out which type of policy will allow you to have that provided at a reasonable cost. The answer is almost always Term Insurance. That is the type my wife and I own.
Other Types of Life Insurance:
I will touch on the “other” types briefly, and the circumstances in which they may make sense. Term Insurance comes in “terms” or lengths of years of coverage. If you bought a 20 year plan, you would have possibly several choices after the 20 years were up. You could let the policy end, or lapse, and that would be that. You could decide to reapply, if your health was still good, for another term. In some cases, the term plan will simply turn into an annual renewable term plan with premiums that increase each year thereafter. Or you could have conversion provisions that allow you to convert the term plan into a “cash value” policy by a certain date.
I believe that most people buy term for the period they feel they need the coverage. Lots of our clients that have children around 5 yrs. old, for example, will purchase a 20 year level term plan. The policy is specifically designed in their financial plans to protect the income that would provide for that child until he or she were out of college and on their own. Many people buy 30 year term plans to cover a 30 year mortgage. If you want life insurance to cover you until you die, even if that death doesn’t come until age 95 years old or so, then perhaps a portion of your life insurance plan should include a “cash value” policy. That cash value policy will cost much more than the term policy because they are covering a longer period. And because, most people die after age 75 or so, the insurance company is more likely to pay a death claim
. With a Cash Value policy, your premiums will include not only the cost of the insurance protection and the policy fee, but also a contribution to a “cash value” fund. Interest is applied to that “extra” premium that you sent in to the company and a cash account builds. It works like this. You send in $1,000 with your annual bill. The company takes $200 for the cost of the life insurance, $60 for the policy fee, and places the remaining $740 into a interest bearing account. Each year, as the cost for your life insurance increases due to your age, a greater amount of money is taken out of your premium payment and directed towards the cost of insurance (COI). But because you are paying a premium amount that is much greater than actual cost of the COI, the “cash value” of your account grows in greater increments than does the increases in the COI. So, while the premiums that you send the company never increase, and your cash account continues to grow, it might appear that your direct cost for being insured never increases. In fact, after years of paying in to a cash value policy, you may actually be able to surrender your policy for the cash value account and receive back more than you even paid in.
Is This a Deal or What?
What one needs to realize is that the cost of insurance (COI) continues to increase each year that you age. There is the illusion that you never pay more as you get older because they started out charging you so much more than they needed to. The reality is, you could buy term life insurance for much less premium and invest the difference in an alternative investment vehicle that would give you a greater return that the interest rate than the insurance company will give you on your cash value account in your policy. Then at the time of your death (lovely thought hey?) your beneficiaries would receive both the proceeds from your life insurance policy (income tax-free), and the value of your alternative investment(at a stepped up basis).
There is another point I like to make to bring a client’s planning into perspective when buying “cash value” or what is also called “permanent” life insurance. How does someone in their thirties decide to buy life insurance that will make sense when they are in their nineties? Due to the time value of money, or put another way, due to inflation and the value of the dollar, this practice only promotes an improper allocation of valuable investment dollars. Let me explain what I mean. I’m 30 years old and want to buy life insurance that will be there whenever I die, even if that is in my 90’s. I figure that $100,000 will pay my mortgage off so that’s a good number. But what is that $100,000 going to be worth in “purchasing power” when I’m 95? If we assume a reasonable rate of inflation to be the standard long-term 4%, that $100,000 will be worth the equivalent of $7,813 in today’s dollars. That is because with 4% inflation over a period of 65 years, what you could buy for $100,000 today, will cost around $1,279,873 by then.
So what a brilliant financial move. You paid into a life insurance policy for 65 years so that when you died someone could just about pay for your funeral. But if you had planned for the unlikely event of you dying at a younger age, and put the rest into a decent investment, you would leave your beneficiaries hundreds of thousand of dollars. And the best part is this. Once your kids are old enough where they’re not relying on you to put food on their table, you could spend some of that money you invested into stocks and mutual funds on yourself.
I haven’t discussed the surrender fees that the insurance company takes out of your cash value account if you want out to the contract in the first 15 years or so. And I haven’t questioned how you would feel making 5% on your money while the stock market made people millionaires in the last ten years. Believe me, I don’t have an ax to grind with the insurance companies. But I have learned several things about buying life insurance since 1985. And I only buy and sell Term Life Insurance, except for some very special and rare situations.
Like life itself, life insurance can be quite complex at times. Not every situation will be addressed easily. And you are not going to learn everything there is to be known about life insurance and the insurance industry over the Internet. There is a lot to take into account here, but the general concept is simple. Everyone is out for themselves to make a buck. Don’t jump in feet first because a nice person told you that they want to help you. And remember...it’s life insurance. It’s an important part of most people’s financial plan, but it is not a good investment vehicle. Get what you need or want for the lowest cost, while taking into account the quality of the company insuring you. If you need help in making your decision you may want to work with a Certified Financial Planner, a Chartered Financial Consultant, or someone that has been formally educated in financial planning. I also suggest that you work with an agent that has been licensed to sell life insurance for at least three years. It may seem like the right thing to do to let your cousin, who has been in the business for a couple of months, sell you insurance. But the odds are, you are cheating yourself from letting some extremely skilled professionals help you in a very important matter. Put knowledge over friendship when it comes to financial planning...trust me. And if you don’t have reason to believe otherwise, you may want to contact your state insurance department to ask if there have been any substantiated complaints filed against a particular agent. They will tell immediately in most cases. If you need more information or questions answered call me at 1-800-BUY-TERM.
How Much Do I Need?
If there is one area of concern while purchasing life insurance that is overplayed more than it is worth, it is deciding how much to buy. When a 35 yr. old man can buy a 25 year $500,000 plan for $34 per month, or $400,000 for $28 per month, I don’t think days of decision making are required. You need to buy the amount of life insurance that will provide at least adequate funds for your family's comfortable existence after you are gone. Shorting them $100,000 to save $6 per month does not make sense in most cases.
There are several way to figure how much life insurance you should buy. Many in the business simply suggest buying 10 times your annual salary. There are financial calculator programs that have you supply data such as your mortgage amounts, debts, current savings, the timeline your survivors will need funding, social security expected, etc. These programs then come up with an amount of insurance that should do the trick. Then you have guys like me. I figured that I would want my Judy to pay off the house we currently live in, pay off the mortgage on our boat, pay off all business debt, maintain a $50,000 emergency fund, have an additional $400,000 for her retirement fund, and another $100,000 for whatever she desires. Oh, there is also $50,000 in there for a shrine over my grave...just kidding. But my plan works for me, because it won’t leave her short-funded, yet it will allow me to know while I am alive that if anything happens to me she will live free of any financial stress. I don’t have to leave her as much as I am, but I love her...she is my best friend...and it doesn’t cost much. With term life insurance I am able to be generous with my wife without sacrificing our current savings plan for our retirement or current life style.
What Isn’t Covered?
Many times throughout the years, people have asked me to explain just what isn’t covered by their life insurance policy. Fortunately, that is one of the easiest questions to answer. Not to be confused with “accident only” policies, which only pay if your death was a result of an accident, your basic individual life insurance policy will pay in the event of your death regardless of the cause. There are two exceptions to the rules however. 1) The two Year Contestable Period: Except for nonpayment of premiums, the validity of a policy will not be contestable after it has been in force during the lifetime of the insured for 2 years from the issue date or date of reinstatement. In other words, after you have had your policy for two years, the insurance company has to pay the claim...period! During the first two years of your coverage, the company can contest the payment of a claim if they can prove you made material misstatements in the application, or if you commit suicide. After that period, misstatements and suicide will not void the contract. 2) Exceptions to the Rules: Even after the two year contestable period has passed, there are several reason that may cause an insurer to decline paying a death claim. The first one is if your death is related to your commission of a felony act. So if you get shot by the police while robbing a bank, your family will probably not receive a life insurance policy pay-out. The other is if the insurance company can prove that the blood and urine or test results were based not on yourself, but on another person. So don’t use your brothers urine or blood when applying for your insurance policy.
This should all tell you one thing...life insurance policies do what they are
supposed to do. They pay when a legitimate claim is submitted. If you are honest when you apply for insurance and you don’t die committing a felony, your family will surely receive their due as beneficiaries. But all this should show you what I have known for years. Term Life Insurance is one of the least expensive tools you can utilize to plan for your family’s or businesses’ survival in the event of your sudden, premature, or unexpected death..
Poor Health Matters!
The best time to buy life insurance is while you are healthy. Healthy in life insurance terms means that you do not have any health conditions, are not’t taking any medications, and don’t live a lifestyle that would cause you statistically to die before the actuarial table says you should die. I will not give a complete list of all conditions that would make buying life insurance difficult or impossible. But I will mention several and assume that you will call me if you have any further questions. Hypertension (high blood pressure) is a problem, buy if it is controlled well with medications you can still buy affordable life insurance. Diabetes is a little more serious and can cause problems when trying to buy life insurance. Cancer, heart disease, mental illness, high cholesterol, drug & alcohol history, build, or flying a private plane, are just some of the conditions and situations that could limit your ability to buy life insurance. And even if your health is fine, the underwriting system that decides whether or not to charge you more for insurance, or even decline to sell it to you, can take your families health history into account. But by far, most people with good health whose parents had good health at least until they retired will have no problem getting excellent rates on term life insurance. The lowest rates are usually given to people that fall into what are called “Preferred” or “Preferred Plus” underwriting categories. To qualify there are additional requirements such as cholesterol below 200, no smoking for 3 or 5 years (or never), and more strict height and weight limits. My experience has been that approximately 40% of the people who apply in general are accepted as “Preferred” or “Preferred Plus”. Of those who apply specifically for the "preferred" rates, about 80% receive that rate.
