Archive for July 18th, 2007
While there are plenty of you out there who paid too much for your life insurance and believe I meant to say “the staggering cost of life insurance”, I meant what I said and I would like to again discuss the idea of staggering or layering your term life insurance.
There are throngs of unimaginative life insurance agents out there who are so anxious to make a sale that, rather than throw out a few wrinkles for the customer to think about, they recommend all your eggs go in one basket. The sale will go much quicker and smoother if they can keep a client from thinking outside the box. The problem is that it is rare that all needs fit neatly into one term length.
Let me just bounce this off of you and please, feel free to point out if I’m crazy. Let’s say you are 45 years old and you have determined that you currently need $750,000 of life insurance. You have a 15 year old child. You are loving what you do for a living and currently anticipate working until age 65, maybe 70. You own a house with a $250,000 balance on the mortgage and have 20 years left to pay on it. Your assets are growing nicely and you’re thinking by age 75, conservatively, you should be able to sustain a comfortable retirement for you and your bride.
Agent A comes along and suggests you buy a $750,000, 30 year term policy. That should cover all of those things he says. Healthwise you qualify for a preferred rate, so you’re looking at $1940 annually, $173 per month.
Agent B comes along and suggests that there may be a more appropriate way to layer your insurance coverage so that it matches your needs more closely. He suggests that we look at a package of 4 policies. $250,000 of 10 year term, $250,000 of 20 year term, $200,000 of 30 year term and $50,000 of permanent coverage.
His logic? Your child is 15. While that is certainly an insurable need now, 10 years from now she will be an adult and there really isn’t a need to carry insurance for someone who isn’t dependent on you, or at least shouldn’t be. So, $250,000 of 10 year term. Your mortgage will be paid off in a maximum of 20 years, so $250,000 of 20 year term.
That still leaves $250,000 in force when you reach age 65, a point where you have already determined you are just a few short years from retirement and your assets should be peaking. Since $200,000 of that is term, if you determine you have outlived the need for it, you can drop it at any point. There is never a problem with dropping a term policy when you don’t need it.
If you kept the term in force to age 75, that would leave you with $50,000 of permanent coverage with a locked in rate to age 100 that won’t strain your budget. I discussed in a blog yesterday, “Why universal life…”, that I recommend that everyone carry some amount of permanent coverage. For most folks I think $50,000 is adequate.
Now agent B has painted a pretty complex picture here. You might be thinking that this comprehensive approach is going to bust the bank. Let’s break it out monthly. $250,000 of 10 year term should cost about $22 per month. $250,000 of 20 year term would be $36 per month. $200,000 of 30 year term should run $55 per month and the $50,000 universal life policy would be about $44 per month.
So, to layer your coverage would run $157 per month for the first 10 years, $135 per month for years 10-20, $99 per month for years 20-30 and then $44 per month for a guaranteed permanent policy.
If you go with Agent A and keep that policy in force for 30 years, you will be overinsured for most of that time and the total cost will be $58,200 over that period.
If you go with agent B, you will pay $47,000 over that same 30 years and will still have coverage in force. In all fairness, if you kept the $50,000 in force to age 100 you would actually spend just over $60,000, so let’s compare apples to apples at that point.
If at age 75 you convert $50,000 of your 30 year term to a permanent policy it will run you about $181 per month. So, if you pay that to age 100 you will pay out another $54,000, for a total of $112,000 paid out for life insurance.
I think it makes complete sense. It’s the way I handle my own insurance and the way I recommend my clients consider handling their own.
July 18th, 2007
Many companies and institutions offer retirement options that are based on how much you want guaranteed during your lifetime and how much you want to continue on to your spouse. Given good health and the proper use of life insurance, you can often have your cake and eat it too.
The scenario usually goes something like this. You retire from XYZ Corp and the maximum retirement income you can collect is $7000 per month. Option 1 would give you the full amount until you die. After your death none of the income would continue to your surviving spouse. Option 2 might provide you $5000 per month until you die and at that time your surviving spouse would receive half of the income, $2500 per month, for the rest of her life. Option 3 would provide $4000 per month while you are living and the full $4000 would continue on to your spouse upon your death.
Using life insurance can allow you to take more of the benefit now and upon your death, the life insurance would provide an income that would replace the lost or lower spousal benefit. That scenario could work like this. Say you decide to take the full $7000 retirement. To supplement that you purchase a $750,000 20 year term policy. Let’s say the policy has a cost of $2000 annually, less than $200 per month. If you die the retirement income will disappear completely, but your spouse can purchase an annuity with the $750,000 that will provide them a guaranteed income for life.
So, instead of foregoing $2000 a month in retirement income while you and your wife are still living, the time when you have the greatest need for income, you spend $200 a month to insure against the loss of retirement the income.
There are those who would argue that you should use permanent insurance, whole life or universal life, for this so that you can’t outlive the protection. But consider a couple of mitigating items. First, if $750,000 is needed to guarantee your spouses a lifetime income now, 20 years from now your assets will likely provide protection enough. Second, the cost of purchasing a permanent policy large enough to accomplish the task would probably render it less than cost effective. If there is some concern about that period after 20 years, put the bulk of your insurance in term and buy a small permanent policy for that period beyond the term.
July 18th, 2007
Here’s where you can get a whole helping of my opinion that has grown and matured and reformed and settled since I sold my first whole life life policies in 1978.
Both whole life and universal life are meant to be permanent insurance. They are meant to be there until you die because they are covering a need that never goes away. A very simple example of a need that never goes away is burial insurance. It is almost always a whole life policy and should absolutely be guaranteed to be there when it is needed.
A larger example of the need for permanent insurance is an estate preservation policy, a policy designed to provide the money to pay estate taxes. That need is there until the death of the owner of the estate. In the case of a married couple the ownership passes to the surviving spouse when the first one dies. When the surviving spouse dies, taxes come due. This is generally covered by either a whole life or universal life second to die policy. In the absence of insurance, most of what a couple earned and worked for could go to the government and not their heirs.
Generally speaking I think universal life is the better product. It is more affordable and can be guaranteed to stay in force longer than anyone has ever lived. The thing I really like about it and the reason it is more affordable, is that it can be structured to accomplish it’s mission without massive amounts of cash value buildup.
Life insurance building cash value really catches a lot of attention. The instant image for most people is having your cake and eating it too. With very few exceptions, the cost of building that cash value is much too high. In a later blog I will provide some actual scenarios to back up my opinion.
I beleive everyone should have some amount of permanent insurance. Call it final expense money. Call it burial insurance. I carry $50,000 of permanent insurance so that, when all the term insurance is gone and we are living on our retirement, if I don’t wake up some morning my wife won’t need to borrow money or liquidate assets until she has had time to put together a plan. I call it bridge money. It builds a safe bridge from my passing to her plan.
I will cover this more later, but when you are looking at permanent insurance, always, always make the agent show you the guarantees in the policy. If it isn’t guaranteed past age 100, send the agent back to the drawing board or find another agent. The last thing you want is a permanent policy that wasn’t guaranteed and believe me, there are plenty of them out there. Millions of policies currently in force are not guaranteed to do what the agent said they would. Make them show you the guarantees.
July 18th, 2007
Probably the most often asked question in life insurance. What is the difference between term and whole life? I will deal with whole life and universal life at another time, but let’s talk about term and what it’s really made to do.
Term life insurance provides a policy with a level death benefit and a level premium (payment) for a guaranteed length of time. The most common term lengths are 10 years, 15 years, 20 years and 30 years. Once you come to the end of that guaranteed period, the price is going to go up dramatically, so it is not a product that is designed to have in force longer than the guaranteed term.
While there are those that would argue that “they are just betting against themselves” when they buy term, they are just kind of missing the target of what the product is made for. If a person wants a policy to be there absolutely until they die, then whole life or universal is the answer. Another blog will cover that.
Term insurance is the right choice for probably 90-95% of life insurance needs for us normal folks. We all have pretty much the same three main basic life insurance needs and the truth is that those needs actually diminish and often disappear with time.
The first need is family protection while we have children that are dependent on us. We don’t want to leave prematurely and have our spouse and children suffer because of the lost income. Children grow up and go away and at some point (this is just a theory), and they are no longer dependent on us. If we were to die, they might miss us emotionally, but should be just fine financially. The need for that insurance goes away. It is a term insurance need.
The second need is also centered around replacement of income. After the children are out of the picture there is generally still a spouse who is partially, if not wholly dependent on our income. At retirement age several things come together. A retirement income will generally (more discussion in an upcoming blog) continue on to our spouse after we die. Social security will offer some part of offset in the financial change and lastly, this is the point in our lives where our assets are generally at a maximum. At that point income has been mostly, if not totally replaced and we have assets that can be used to further supplement the picture, reducing or negating the need for the large amount of term insurance that was carried for income replacement. The need goes away. It is a term need.
Third is our mortgage. As long as, at some point, people quit refinancing their homes every other year, our mortgage will get paid off or at least get paid way down. At that point the large amount of term insurance set aside for that purpose is likely not needed anymore. The need goes away. It is a term need.
That’s the big three, but there are plenty of places where term is simply the right product. I advocate term for use in most business life insurance. The truth is that businesses change and generally a term policy can be used to cover the particular need. Buy/sell agreements don’t usually go on to age 100. The need goes away when a partner retires. It is a term need. The bank wants a business person to assign all or part of a life insurance policy to back up a loan. The loan doesn’t go on forever. The need goes away when the loan is paid. It is a term need.
Sometimes for health reasons, term is all a person can afford. Something is always better than nothing. It is a term need.
Bottom line. Term is a great product for most needs. It is tremendously affordable. I’ll write more about how to make term work for those needs that don’t go completely away at a later time.
July 18th, 2007
