Archive for September 16th, 2007
Probably the most common scenario I hear is children or grandchildren considering purchasing a life insurance policy on parents or grandparents. Their thought process is, that if the cost isn’t too high, it could be a decent investment. My personal opinion is that purchasing life insurance as an investment, well….it just isn’t right. Life insurance is meant to replace a financial loss, not create wealth where it didn’t previously exist.
Another option that pops up occasionally is an ex-husband or ex-wife wanting to purchase a policy on the ex. Their thought process is to try to make a bad situation better by at least coming away from it financially better off. I suspect there may be some issues with this type of policy from a mortality standpoint.
The problem, quite often, is when these policies are proposed without wanting the insured person to know about it. The problem with that proposal is, if the proposed insured is an adult, they have to be a consenting party to the life insurance contract. For obvious (I hope) reasons, purchasing life insurance on another person without there knowledge is simply illegal.
The one exception to that would be purchasing insurance on a minor, a child. The law does allow the purchase of policies on minors as long is there is financial justification. Final expense policies would meet that threshhold. For anything more than small final expense policies, financial justification, the actual monetary loss incurred upon death, is required. Large policies on minors would take extraordinary justification. Very seldom is there a real, justifiable need.
Bottom line. If the proposed insured is an adult, they have to be a consenting party to a life insurance application. You just can’t buy life insurance on another person without their knowledge, no matter what your justification is.
September 16th, 2007
Life insurance companies stand ready to cut the large check you want them to in the event of your passing. In far more instances than you can imagine the companies are never given the chance to come through for your beneficiaries because, you neglected to tell them about the insurance or neglected to tell them where you keep your policy or policies.
Ensuring the payout is just a matter of communication. Again using myself and my bride as an example, I have made sure that she knows what I have in force and where the policies are. We occasionally review it so I’m sure she would know what to do if I passed away.
There are two reasons I emphasize your beneficiary knowing where the policy is. When a claim is filed, you beneficiary will be asked to fill out claim forms and return the original policy with those forms. It’s not mandatory since obviously things can get lost over the years. If your beneficiary can’t locate the policy, they can file a lost policy affidavit.
Probably more important than whether or not your beneficiary has an original for the company, is whether or not they can find the policy so they will know what company the policy was with. While not an impossible task, with over 2000 life insurance companies, tracking down who your spouse had life insurance with, in the absence of a policy, is a daunting task. It can takes months, months that your beneficiary will go without the benefit of the life insurance they need.
Bottom line. Don’t make a secret out of your life insurance. Let your spouse know what you have, who it’s with and where the policies are. Pick a backup person for the same knowledge. What if you and your spouse are in a common accident and you die and your spouse is incapacitated?
September 16th, 2007
Term insurance or whole life? Term insurance or universal life? How should you decide just what product best fits your need for protection for your family?
I’ve discussed in numerous posts how to determine the proper term length and the proper use of term insurance. There are plenty of good reasons for permanent insurance. I have beat to death the subject of whole life versus universal life so for the purposes of exploring the uses we will stick today with the generic permanent.
The key element in determining term versus permanent is the length of the need. In the case of permanent insurance, it’s a matter of a need that just doesn’t go away.
That need can take several forms, but let’s start small and work our way through life insurance policies that, by the nature of the need, you simply do not want to outlive. Probably the purest example would be a burial policy, also often called a final expenses policy.
In either of these instances, outliving the policy you’ve been paying for simply doesn’t make sense. It is a permanent need. You need it to be there when you die.
I will use an example from my own portfolio as another need that is clearly permanent. I carry enough term insurance of varying lengths to ensure, at any given point through age 80 or so, there will be enough insurance to take care of my wife’s needs it my absence. I also have a $50,000 permanent policy.
The reason I carry this policy and the reason I believe it should be considered in most situations with husbands and wives, is that I believe it is a smart move to provide your spouse with enough money to bridge the gap between your death and their activation of the plan for the rest of their lives. In my case I believe there will be plenty of assets. What I don’t want my bride to have to do is make any kind of rash decision on how to use them.
Many people carry life insurance policies purely for the purpose of leaving money behind to their adult children. If that is a desire of yours, you should absolutely consider permanent over term. What you don’t want to do is put substantial money into a term life insurance policy for your children, and then outlive the term. At that point you would have to make a choice of dropping the plan, applying for more term insurance at higher prices (with the chance of outliving it again), or converting it to a permanent policy at a higher rate than you would have had to pay 10 or 20 years earlier.
There are plenty more, but the last example I will throw out is that of estate protection. Whether it is federal estate taxes or state death taxes, someone is going to want a bite out of any substantial estates. Carrying life insurance for the purpose of paying these taxes is a prudent move, but definitely a another example of a policy that you simply don’t want to outlive. Anything short of permanent could potentially cost your estate rather than saving it.
Bottom line. Term insurance fits by far the majority of needs, but there are plenty of good, solid reasons for permanent insurance.
September 16th, 2007
