Life Insurance

Life insurance is the most remarkable, dynamic financial product ever developed!  Strong words?  Yes, and accurate.

With the passing of a physical exam, paid for by an insurance company, and by paying as little as the first month’s premium on a life insurance contract, an entire life’s worth of financial goals can be met for a family.  A home mortgage can be paid off; a child’s (or children’s) college education(s) can be assured, a family’s debts eliminated.  All this and more at the worst possible time for a family—the loss of an income earner! 

But first someone has to buy an adequate amount of life insurance.  Two questions should be asked here: what is an “adequate amount of life insurance” and what kind of life insurance should be purchased?

Let’s start with “how much” is adequate coverage:

There are many computer programs available to determine an appropriate amount of coverage.  But after thirty years of using many of these programs, I have evolved to a simple formula that comes out very close to what the complicated programs show. (Please note that it is better to be conservative and arrive at a number that is higher than one that is lower and may leave dependents wanting.) Try this:

1.Multiply your annual income by 7 (if children have left home) or 10 (if children are young).

2. Add the balance on your mortgage to the previous total.

3. Add all outstanding debts, i.e. Credit cards, auto loans, personal loans.

4. Add an amount for college educations for each child ($80,000 to $120,000 per child dependent upon public or private universities).

5. Subtract out current in-force personally owned life insurance.  (Do not include employer group life insurance as you may change employment or the employer may discontinue such coverage.)

6. What’s the total?

Don’t be intimidated by an amount that appears to be twelve or fifteen times your annual income.  The truth is that most individuals are underinsured to protect their families while the cost of providing such coverage is not nearly as expensive as you may think.

Look at these expenses and you will see that most of them will decrease as time goes on; your mortgage will be reduced or paid off; your children will grow up, move out, and their college expenses will be met.  As each of these occurs your dollar needs will be reduced.

Some responsibilities will go on forever, i.e. is there a dependent non-working spouse? A disabled spouse or child to be cared for? Final expenses, probate costs, Federal Estate Taxes to be addressed?

Let’s look at the life insurance options available to meet your needs:

Option 1: 

Term Life: On an annual basis the most insurance, dollar for dollar, that you can buy.  This coverage offers pure death protection.  Generally this form of insurance only pays a benefit when the insured dies. However, recently a few insurers have begun offering a Rider that will return paid premiums after the policy has been in force for a number of years with a full refund of ALL premiums at the end of the policy term.

This form of coverage is typically purchased in increments of time.  For example a ten year term.  The premiums and death benefit are guaranteed for ten years.  Term plans come in increments of five, ten, fifteen, twenty, twenty-five, and thirty year plans, dependent upon age at inception.

Note that a twenty year term plan will cost more annually than a ten year plan.  However, if you need coverage beyond ten years the average annual cost of the twenty year plan will be less than buying a ten year plan and renewing it for a second ten years.

Subject to your health, consider shopping for new coverage every four to five years.  In the past several years a number of highly rated insurers have dropped premium rates to “buy up” more of the market.  But remember, never drop an existing policy until a new policy has been placed in your hands and you find it acceptable. 

Option 2: 

Whole Life Insurance: This form of insurance is designed to be in force for life. It usually has a level lifetime premium, a guaranteed cash accumulation value, and the better contracts also pay dividends which are not guaranteed and not taxable.

The typical whole life contract will guarantee that the cash accumulation values will be growing at a rate equal to or greater than the annual premium within five to seven years after the contract’s inception date.  If the dividends are paid as projected, the policy’s value will grow even faster. 

Accumulated cash values are available for loans at very modest interest rates and there is no “qualifying” for loans.  The money is there for you when you need it. In fact, if you have enough dollars accumulated you can self-finance even major acquisitions such as cars, college, or business purchases.  If eventually you determine that you no longer need life insurance, the cash values can be used to add to your retirement income through borrowing from the policy or by converting the contract to a lifetime annuity.

When the Waiver of Premium for Disability Rider is added to the policy and the insured suffers a serious disability, the policy’s values will grow even if the insured is unable to make premium payments.  This feature can add countless dollars to the security of the insured or the insured’s family.

Option 3: