Archive for May 22nd, 2008
I went off a bit on some of the more ridiculous combinations with smoking the other day. Smoking and asthma. Smoking and heart disease, etc. Some guy (blog name Joe Camel (clever)), took some hard swings at the life insurance industry for being so mean to smokers. Fortunately for me smokers run out of breath quick and the hard swings turn to frail flailing.
So let me throw a little different spin on this subject and see if makes the point. 120,000 people a year die from COPD (chronic obstructive pulmonary disease), almost all of them smokers. COPD is the number four killer in the US behind heart disease, cancer and strokes.
The American Lung Association shared some interesting facts about the little talked about COPD.
It seems that COPD is another one of those silent killers, not unlike high blood pressure or hypertension. Often the symptoms are shrugged off as natural consequences of smoking or lifestyle. Things like smoker’s cough, or just feeling your age or feeling out of shape. The longer they are shrugged off, the more damage your lungs suffer.
Bottom line. Whether you agree with life insurance companies and their underwriting guidelines around smoking, do the right thing. My wife and I recently vacationed in Mexico and in the duty free shop at the airport they were selling huge boxes of cigarettes. I think each box must have held 10 cartons or something. On the top was the brand name of the cigarette and on the side, in huge letters that covered the whole side of the box, it said SMOKING KILLS! Sounds like someone down there understands the statistics.
May 22nd, 2008
Return of premium term life insurance is certainly a hot topic these days, so where do you turn to get an unbiased analysis of whether or not it is a good fit for your financial needs? I guess my best advice is simply to steer clear of anyone that thinks it’s the right answer for everything.
After years of analyzing ROP, it is very clearly not a one size fits all type of product. The premise is attractive. You buy term insurance and if you don’t die you get all the money you paid in back. Here is a Forbe’s magazine take on the idea.
forbes-return-of-premium
Forbes is clear about how the whole deal works. The insurance companies simply overcharge for the insurance allowing them enough extra interest earning excess that, even after paying back all the premiums at the end of 20 or 30 years, they make a handsome profit. The real frosting on this cake for the insurance companies is not that they got to use excess premiums for 30 years, but if they’re paying back the premiums that means they got out of paying “the big one”, the death benefit.
I don’t mean to infer that the insurance companies are getting their cake and eating it too. I believe there are certain instances where return of premium can be appropriate, if not purely the prudent choice.
The first place where I think this idea has some real merit is with younger adults. For instance if you take a young married couple around 30. Some would say buy whole life because term insurance won’t last long enough and whole life is permanent. Those are whole life agents and what they want is large premium, large commission and large renewals. But consider this.
People at 30 barely have a grasp of life insurance and certainly don’t have a handle on whether their life insurance needs are temporary or permanent in nature. They generally do have two things way in their favor, they’re young and healthy. I believe a 30 year ROP policy is a prudent move. Numero uno, it gets them insured. Second, the rate is locked in level for 30 years, into the years when they will in fact have a handle on what their real insurance needs are. Third, the policy is convertible so their youthful health rating is locked in for the full term and they can always convert all or part of the policy to permanent coverage. Lastly, at the end of the 30 years they have the option of taking a full tax free cash refund or rolling the returned premium into a permanent converted policy to drive the cost of the new policy down.
That’s what I recommend if you’re young. You can get a lot more coverage for a lot less money than whole life and the ROP policy has more flexibility and options.
Another perfect fit is key person business coverage. Often a company will carry a policy on a key person simply because they have economic value to the company. Their death would cause a financial setback that the policy can offset. A key person generally happens to be someone that a company depends on for a long time and would like to reward for their service upon retirement. So, the company can protect themselves and, if the key person lives to retirement, they can use the returned premium as a retirement bonus.
Outside of those two areas I think the product should be carefully weighed against your own ability to invest the difference between the premiums for straight term and ROP. Also, budget should be carefully considered. Does the increased premium stretch your budget or cause you to purchase less insurance than you need?
Bottom line. Return of premium is a product worth a look, but it isn’t right for everyone. A good independent agent should be able to crunch the numbers for you on all of the available options and help you make the right choice.
May 22nd, 2008
We all see advertising on a regular basis offering life insurance without an exam. I can tell you personally I am not a big fan of having blood drawn and peeing in cups either, so I understand the appeal.
What they obviously aren’t going to share with you is the cost of convenience. They also don’t make it very clear that, opposite of most people’s assumption, just because they don’t draw blood doesn’t mean they aren’t going to investigate your health.
First let’s address the cost of convenience. Just to keep things apples for apples I am going to quote the same amount of insurance and term length with a company that offers insurance with and without exams. For this example we will use Liberty Life.
For this example we will assume a 40 year old male in great health. Just hates the hassle of an exam (they aren’t really a hassle by the way). If he gets a simplified issue (no exam) policy for $250,000 of 20 year term insurance it will cost $775 annually. If he gets the same amount with a fully underwritten (exam) policy it will cost $365 annually. So, the cost of convenience is $410 per year for 20 years, $8200 just so he didn’t have to pee in a cup.
As to the other issue. A lot of people assume that no exam means the company doesn’t care about your health. Nothing could be further from the truth. We’ve already seen that they are concerned enough to hedge their bet by more than doubling your rates. They are also going to check with the medical information bureau to see if there is any health issue that maybe you haven’t shared with them. They also reserve the right to obtain medical records. They want your business, but they’re not being stupid about it. They will decline you at the slightest bit of discomfort about your mortality risk.
Bottom line. If it sounds too easy, it’s going to cost you. If you see it as a loophole, it’s likely to snap shut on you. Suck it up and do the exam.
May 22nd, 2008
