Posts filed under 'term insurance'
Clients being ever vigilant for the fine print or hidden costs occasionally ask how I get paid. The core of the question for them is, of course, any additional cost they might incur above and beyond the premium.
Almost all life insurance agents are paid on a commission basis by the company. For term insurance it is generally a percentage of the first year premium with no renewal commissions paid. With whole life or universal life it is generally a percentage of the first year premium and a modest renewal commission for anywhere from 5-10 years.
I’ve made no bones about the fact that I’m not a fan of whole life insurance and that I believe that if you get down to the core of why agents choose to concentrate on whole life versus versus term insurance or even universal life with a no lapse guarantee, it’s commission. I’ve been torn asunder for this assertion on a number of occasions by whole life agents who will claim to their death that they really believe whole life is the answer for all life insurance needs.
I maintain there is a point when a person “outlives” the need for most of the life insurance they might carry during their child raising, higher income days. So, let me just throw out some facts and you can give it some thought. Maybe I’m all wet. Maybe not.
Let’s use a 48 year old guy who needs $1 million of coverage. He’s a doctor and is confident he will be comfortably retired by age 70. Just to give him a little wiggle room we got him $1 million of 30 year term that will cost $3320 a year at the preferred rate he qualifies for due to his being a private pilot. At the end of 30 years he will have paid $99,600 for the protection he wanted. If he reached a point before then that he had outgrown the need for it, he could have dropped it and paid less.
He can get $1mm of whole life for $21,000 a year. Over the next 30 years his premiums will total $630,000, but that will be offset (according to the whole life agents) by the fact that the policy will have accrued cash value of $591,572. So, without digging any further it’s plain that a person could take the cash value and end up paying about $38,500 for the insurance over that 30 year period. Good deal?
So, where’s my leg to stand on? Well, let’s start with the most obvious, $300 a month versus $1750 gets my attention. But what if money just really isn’t an issue. I know “buy term and invest the difference” is a worn out, beat up old piece of common sense, but really, it still is common sense. If you can afford $21,000 a year without stressing your budget, buy the term and free up $17,680 a year to invest outside the policy.
Whole life guys will tell you no one has the discipline to actually budget that $17,680 and invest it, so the whole life is a kind of forced investment/savings/retirement plan. Well, that may be true for some, but I would venture a guess that if someone can’t do that, they will also eventually lapse the whole life policy. If they lapse their insurance their family has no coverage. If they don’t invest the $17,680 one year, they still have all of their life insurance.
So, what if a disciplined investor socks away $17,680 a year for 30 years? At a fairly modest 6% return, that generates $1,481,000. There are plenty of mutual funds out there that have averaged 12% or more for a very long time now. What if they put that extra money into those kind of funds? At 12% “the difference” generates nearly $5 million. Even with the taxes that will be due it beats whole life.
And about that cash value. Generally it isn’t left alone. The truth is that the agents will tell you that you can borrow it (use it as your personal bank) or pay premiums from it. Well, unless you pay back the loan the death benefit has been reduced.
Now all the claims I’ve made came from a real whole life policy from a highly rated company. I took all of my numbers off of the guaranteed side of the illustration. Any agent that would use the non guaranteed figures to sway you to buy should have to take in your family and care for them when you die without any insurance.
Bottom line. If you lack discipline and have enough money to buy whole life, buy term and put the difference on an automatic eft into an investment plan.
I almost forgot why I got off on this subject. It’s the commission. On the term insurance an agent would typically get about 90% of the first year premium or about $3000. The whole life agent would typically get about 70%, so they make $14,700 the first year. Normally they would get around 3% annually on renewals, $630 a year, for at least 5 years, another $3150 in commission, $17850 total. So, all I’ve been saying is that the amount of commission could certainly be a factor in swaying someone to push a client in a direction that just might not be best for the client.
March 8th, 2010
A year and a half ago when everyone’s 401k’s had suddenly turned into 201k’s I threw out the suggestion that people buy 10 year term insurance as a way to kind of fill the bucket back up until things recovered.
Now true, it wasn’t an idea to fill your bucket back up, but rather your surviving spouse’s bucket. Now, if you had $10 million in investments for retirement and you lost half of that during the 2008 economic bowel movement, you could probably make a case for the idea that if you died, your wife could get by on the remaining $5 million. I’m thinking your wife might take exception to that line of thinking, but you could give it a whirl.
But that scenario isn’t the average American couple. The average American couple has saved something in the neighborhood of $100,000. That means retirement at all is going to be rough and if you lost half of that when the toilet flushed, even if you cut the number of people in half by kicking the bucket, the surviving spouse is going to be hurting.
When I suggested 10 year term life insurance, it was based on the fact that most of the “experts” believe that the economy will recover, eventually, to the point where it was before the fan got hit. But, if they’re right and it does recover to that point, you will have lost years of growth because, face it, recovering isn’t growing. So here’s kind of what I’m thinking these days.
Term insurance is still very affordable. If you are average and only have $100,000 socked away, consider buying $500,000 of term insurance and buy it for as long a term as you can comfortably budget. Face it. The way our country is going right now they may not even get the toilet clean from the last experience before it goes into use again. Instead of just barely getting your spouse back up to “average”, consider getting her to a point where she has a chance at a comfortable retirement.
Inflation is coming. Everyone believes it is and I don’t know enough about it to disagree. If it does, just getting your portfolio back to where it was isn’t going to cut it. Am I suggesting you buy more life insurance than you need? Absolutely not. I am suggesting that if you and your spouse have underachieved on savings and you don’t have a great plan in place to turn that around, there is a way to ensure that if only one of you is around to deal with it, they have enough money to do just that.
Bottom line. Americans are getting better at saving and we’re getting out of debt faster than ever (thanks to Dave Ramsey), but for most of us we started a bit late in life. I feel bad about that, but at least I can make sure my lack of planning doesn’t create an unfortunate situation if I check out early.
March 3rd, 2010
It’s probably been close to a year since I first mentioned the United of Omaha (Mutual of Omaha) lifestyle crediting program for life insurance underwriting called the Fit test.
The Fit test provides the underwriter plenty of ammunition to approve a policy at better rates than the underwriting guidelines might otherwise lead to. This has been done plenty in the past with permanent life insurance. Sales incentive “table shaving” programs have been around for a long time on universal life products where the premiums are high and it’s easier to knock off a few rate classes and still have plenty of money coming in to cover the risk. Where United really stepped out was offering this on term insurance and being bold enough to spell out the criteria that earn the credit.
Today we got an approval on a client with bipolar disorder. This wasn’t an easy case. The best tentative offer we got when we shopped it was United of Omaha at table 4. For those that don’t understand what table ratings mean, rates classes go preferred plus, preferred, standard plus, standard. After standard a policy is table rated. Each table with most companies is equal to 25% of the standard rate. So, if a policy at standard has a cost of $1000 a year, a table 4 would be $2000 a year.
United of Omaha’s Fit test allows for a credit of up to 2 tables, 3 in a few instances. In the case I described above, approved at table 4 it received a 2 table credit. To put that in perspective as far as what that can mean for the customers, they now have the option of paying 25% less for the 20 year term they wanted or the possibility of now going to a 30 year term for not much more than they originally budgeted for 20. It’s good stuff.
Bottom line. When United of Omaha first announced this program we all viewed it through slightly jaded eyes. It looked like a great opportunity but table shave programs in the past had often turned into bait and switch games by the company. But a year later I am ready to say that United of Omaha is the real deal. They have great underwriting and the Fit credits really do provide an underwriting emphasis on a healthy lifestyle.
February 23rd, 2010
Using a LIMRA study of a few years ago, at that point there were tens of millions of Americans that would fit into a category of “needing” life insurance, but didn’t have any. I know I’ve been down this road before, but is there really a case to be made by those millions of people, a good case, for not having life insurance protection for their families?
Just a few facts from that 2008 study kind of paint the picture.
Many U.S. families are not prepared for an untimely death
* Fifteen percent of husbands and 28 percent of wives have no life insurance.
* 6 million households (ten percent of families with children under 18) have no life insurance.
* The percentage of families with dependent children that admit they’ll have immediate trouble with everyday living expenses is 22 percent. Another 26 percent say that if a primary wage earner dies they’ll only be able to cover expenses for a few months.
So, 48% of families are either uninsured or grossly under insured if they are going to be in immediate or imminent financial trouble if the primary wage earner died. That’s half of the families with dependent children! That is just crazy. Oops. Kind of tipped my hand on where I stand on this question.
While the LIMRA study didn’t break it out by the age of those that were uninsured or under insured, I would venture a guess that most are in their 20’s or 30’s, those years of immortality when the idea of budgeting $20-$30 a month, every single month, for life insurance is like, well, it’s like acting just a little too grown up. What if they need that money to go out to dinner, or buy beer for the super bowl?
Maybe that’s a bit harsh. Truth is that in too many cases money is just tight for young families with children. But if that’s the case and that’s really the only reason you’re not doing the right thing, ask your parents for help. My children have life insurance because I pay for it. As a parent and grandparent, if you really think it through, there is a lot to be said for carrying a term insurance policy during that period when your children have dependent children.
There has been plenty made about how medical bills can bankrupt a family. How about when those medical bills end in the death of a family bread winner? With life insurance bankruptcy is taken out of the picture, as is the stress of the financial meltdown that can occur upon that death.
Bottom line. For me it comes down to this. If you’re old enough to have kids or old enough to be married; if you are old enough to have responsibilities that would impact someone else upon your death, you should have life insurance. No excuses. If you can’t afford it, get your parents or grandparents to help you. If you’re just blowing it off, get a friend to slap you in the face and wake you up. It’s time. Not later. Now!
February 23rd, 2010
I don’t think I’m suffering from the delusion that everyone has vast amounts of left over money they can buy life insurance with. I know that my left over money is far from vast, and probably better characterized as sporadic, but my life insurance is already budgeted.
And believe, having survived a Dave Ramsey money makeover, I completely understand the need for and importance of a budget. I guess I wonder though, when I am working with someone who is trying to decide if they should get $250,000 worth of term insurance, or perhaps drop it down to $150,000 to make it more affordable, where the heck the rest of their $75,000 in income goes? Are their responsibilities prioritized, or are they paying $500 a month on a car payment, $250 a month on a jet ski, $150 a month on a dirt bike, and gritting their teeth at the thought of spending $75 a month to get the right amount of life insurance to cover the need?
I’m left shaking my head more often than I wish were true at people (men) who really believe that leaving their wife and 4 children behind with $250,000 is “gettin er done”. I’m left wondering, if they could afford it, would they even buy adequate insurance then? If someone turned Dave Ramsey loose on their budget and straightened things out to the point where it was easy to budget $1,000,000 worth of 20 year term insurance, would you pull the trigger?
Bottom line. It’s pretty simple to determine where a man’s family stands in his life. How much is spent every month on play and toys (his, not the kids), and how much is spent on life insurance? I like to play right up there with most folks, but making sure my family can carry on without a struggle is my highest priority.
February 12th, 2010
Fair question since over the past ten years we have seen some shocking things happen in business. Highly rated, highly respected companies biting the dust. What about Enron? Not an insurance company, but poor management of a large trusted company.
So, what if it had been an insurance company? What if it had been a life insurance company where you happened to have all of your family protection? What if it happened to be the company that had sworn it would fend off disaster for your family if you were to die prematurely? Enron just disappeared. Poof! Gone! Is that the same thing that happens when an insurance company goes under?
The good new is the answer is no. There really isn’t any way to compare Enron with, say, Empire General went out of business a few years ago. A lot of my clients had policies with them so I got a lot of calls about what was going to happen. The truth is that Protective Life picked up their entire block of business and kept it intact, didn’t change any of the terms (they couldn’t by law) and those policies are fully in force today.
Maybe that wasn’t a fair example because Empire General was part of the Protective Life Group to start with. But the same held true for Federal Kemper when they were purchased by Zurich, Zurich when they were purchased by Chase, MONY and US Financial when they were purchased by AXA Equitable and Travelers when they were purchased by Met Life.
With insurance companies the block of business has value because of the cash flow from premiums. I guess there should be some distinction drawn here between term insurance and non guaranteed cash value policies. With term insurance there aren’t any moving parts. Premium and death benefit. If another company is looking at buying a block of business, a lack of moving parts, bells and whistles is a good thing.
With cash value policies, and specifically cash value policies that are not fully guaranteed, I think some concern about what happens if the company goes under is warranted. While it is as close to an absolute that the block of business will be purchased if it is all fully guaranteed policies, I honestly can’t think of a reason that a company would buy a block of non guaranteed business unless the downside on that part of the business was dwarfed by the upside on the guaranteed portion.
Bottom line. If you have a guaranteed level term policy I wouldn’t worry about your company. The only thing that will change if they go out of business is who you make the premium check to. By law everything else, the premium, term length and death benefit, has to remain the same.
If you have a variable universal life, or a universal life or whole life policy that is dependent on assumptions and not guarantees, I would switch to something fully guaranteed before you have to find out if it will survive your company’s demise.
February 9th, 2010
Wouldn’t it be great if everything always went as planned? You determine how much life insurance you want. You figure out how long you need it for and you set a budget based on what you believe it will cost. Check, check and check!
But what do you do when things go the wrong direction on you? What happens when underwriters have a completely different opinion of your health issues after reviewing your medical records? What if, in the end, the cost per thousand dollars worth of life insurance is much higher than you anticipated?
Well, in the absence of an overwhelmingly compelling argument for the increased rate, I am a huge advocate of a second opinion. Generally at the point where you have an approval, as disagreeable as it might be, you also have the advantage of having all of the medical records in house and the advantage of seeing exactly what the underwriter saw that turned them away from the rates you were expecting. So, as your agent we shop it fully disclosing everything we think might affect the rate. While we may not get back to your original expectations for rates, in many cases this can improve the picture dramatically.
But let’s talk about the other way it can go. What if, after shopping it to tears, we find that the first offer wasn’t just the best offer, but the only offer? What if once we have peeled back all the layers of your medical information, that original offer starts to look like, if not the best you will ever do, at least the best you are going to do in the foreseeable future? It’s time to have a heart to heart with your agent, your spouse and reality.
Let’s say that your original budget was $2000 a year and your application was for $1,000,000 of 30 year term. At the approved rate, which we have found is as good as it will get for now, you can get $250,000 of 30 year term, $500,000 of 20 year term, $750,000 of 15 year term and $1,000,000 of 10 year term. The question then turns back to the medical records. Is this a short term issue that with effort and good followup will change favorably over the next few years? Is there a good possibility, given optimal improvement, that you can get back to the original rate class within a few years (a discussion between your agent and the underwriter can answer this question)? Or is this really as good as it is going to get ever?
If the issue is one that can be turned around in 2 or 3 years and you can get back to the original rate class, there is some logic to taking one of the two highest face amounts. It is, after all, the amount of insurance you felt you needed, and if you can reapply in a few years and get it back down close to the original rates, you will have had the coverage amount you wanted and within a few years you will be able to have both the amount and the term length you wanted at very close to the original rates.
If, on the other hand, the issue is not something you can expect to go away or at least something that won’t be viewed differently by an underwriter in the near future, it’s time to decide what’s more important, death benefit or term length. Is it possible, knowing that life insurance may not be a long term fix, that you can use a shorter term to get things (assets, debts paid down, etc) that will allow you to have less or no insurance in the future?
I think it’s imperative to avoid knee jerk reactions in either direction. Your budget didn’t come from nowhere, so don’t increase your budget unless you know it’s sustainable. And having the insurance was a real need before you got the bad news, so don’t take your bat and ball and go home just because you suddenly don’t like the rules of the game.
Bottom line. Stick to your budget and determine what your priorities are and put the life insurance in force. It may not be what you wanted, but something is always better than nothing.
February 8th, 2010
Term life insurance offers a guaranteed level death benefit and a guaranteed level premium for certain period of years, the term.
Is there a chance you could outlive that term and spend the money it took to keep your policy in force without the policy paying out a large sum to your beneficiaries? Of course there is. Does that mean that term insurance is a bad way to ensure your family is taken care of during those years when they are dependent on you? Absolutely not.
I’ve talked a lot over the years about how I firmly believe that 95% or more of life insurance needs are term insurance needs. Let’s get real. Do you carry auto insurance on a car after you sell it? Do you continue to pay for homeowner’s insurance after you sell the house? Do you really need to carry life insurance for the benefit of your children after they are no longer dependent on you? The answers are no, no and c’mon, let’s get real, NO!
With the exception of very small final expense policies and policies to provide money for estate taxes, everything else, if properly put together, can be covered by term life insurance. Permanent policies such as universal life and whole life are simply like using an elephant gun on a mouse hunt. The ammunition and the gun are just way too expensive for the target you need to hit.
So, with affordable term insurance policies going out to 30 years, let’s kind of review life insurance needs and see how it works. The two most prominent needs for life insurance in my mind are income replacement for the care of children, and in the absence of children for the benefit of a spouse.
Just for the sake of this example let’s say there is a 30 year old couple expecting their first child. The husband could take out a 20 year term policy and call that good, as the child would then be grown, but probably the more prudent route would be a 30 year term. That covers the child on the way and in all likelihood, any additional children they choose to have or are surprised by over the next 10 years. If a child really sneaks up on them in their 40’s, they could always take out a separate policy just for that reason.
And it would probably be in their 40’s that some serious evaluation of the adequacy of their life insurance in reference to retirement would be happening. It might be a great time to consider replacing the first 30 year term with a new term that will 1. Finish the job of raising the children that came during their 30’s, 2. Extend the term to cover the 40’s child, and 3. Ensure that life insurance is in force that will go to retirement when income replacement is generally a mute point.
Of course a whole life purporting agent would say that, since you really don’t know how all of these things will unfold ahead of time, buy a whole life policy and you won’t ever have to change anything. What they will downplay is the fact that while you have a need that calls for $1,000,000 of life insurance, all you can afford if you go the whole life route would be $250,000.
So, if a need, on the face, appears to be temporary, don’t buy permanent insurance to cover it. If everything goes wrong and your temporary needs all become permanent, well, term insurance comes with a conversion option that allows you to adjust your policy in the future to make all or part of it permanent.
Bottom line. I take the responsibilities in my life very seriously and have carefully chosen term life insurance policies to cover different aspects of my life. I look forward to the day when I outlive each of those term life policies because it will mean that I’m alive and a need was taken care of.
January 18th, 2010
From a life insurance perspective. Heck, from just about any perspective this has been one crazy year. But the sky didn’t fall and I think it’s time we put it all in perspective and move on.
Term life insurance prices have been in something of a free fall for the last 12 or 13 years. At times the fight to be at the bottom of the prices was so intense that companies would have rate changes as quickly as they could get them approved, sometimes decreasing rates in successive months. It was great for the consumer and I suspect because it opened up affordability to so many new clients, good for the companies also.
Then came 2009. In a post a year ago I talked about a shift in that trend. It started slowly, but has picked up to the point that I think it could be definitively said that the downward trend in term insurance rates has stopped. I’m still not willing to say that it’s going to be the start of a trend in the other direction as some key companies are holding on, but downward is a thing of the past. The good old days when you could buy life insurance and then buy it for less 10 years later are gone. Those who thought they were beating the system by taking the Selectquote 10 year term insurance cheap way out are going to find they should have chosen the appropriate term to start with.
The good news in all of this is that, even though the downward trend is gone and there have been some rate increases, fully guaranteed term life insurance products are still the best value out there for 95% of the life insurance needs that exist.
Bottom line. Term insurance and no lapse guarantee universal life rates are still at an all time low. It is a great time to review your portfolio, or create one.
December 23rd, 2009
I watched Dennis the Menace the other night and early on in that film it was clear that Mr Wilson would have preferred to have $100,000 in his pocket and no Dennis as a neighbor. That’s probably a bit harsh, but the answer as to why he couldn’t have that is called insurable interest.
Insurable interest is one of those rubs that I get to deal with every once in a while when someone calls and wants to get quotes on their aging mother for $250,000. They are inevitably put out when I ask them what the purpose of the insurance is. Sometimes it is genuine and clear cut. Mom owes a quarter of a million on her house and wants to leave it debt free to her children.
Other times it’s way murkier. Mom is poor and they don’t see any inheritance coming (like it’s a right for them to have one), so they want to create an inheritance by insuring Mom. The issue with insurance companies is called insurable interest. The insurable interest question is “what loss occurs upon Mom’s death that requires $250,000 of life insurance to make the family financially whole again?”
We all know that there are plenty of policies that have been put in force over the years with no insurable interest. One of the questions that swirls around the whole life settlement issue is whether an investor truly has insurable interest when they buy a life insurance policy from someone who wants some cash and sells theirs, but that’s a subject for another post.
The question in my mind with a lot of these “Mom” deals is, down the road is their heart going to be with Mom or with that life insurance policy? Suppose they buy a term insurance policy and it is coming to the end of it’s guaranteed level premium period. Are they going to be thinking about all the money they’ve put into that policy and the possibility of striking out or will they just be glad Mom is still around?
Bottom line. Life insurance is not and should not be a means to profit. It was never designed for that and never meant for that. Mr Wilson didn’t have an insurable interest in Dennis and you don’t have an insurable interest in anyone unless their death causes you a financial loss.
November 23rd, 2009
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