Mike’s Life Insurance Advice

Hi Michelle,

That’s a very good question.

Realistically, most folks have the greatest need for life insurance when they are younger. At that time in their lives they often have a young family but have not put a significant amount of money into savings. Usually a person’s assets grow over the course of their life. If that happens, once their children leave home, unless they have a disabled child who could survive them, some people feel that there is often no need to have an insurance policy.

With that in mind, now is one of the best times to buy what’s called term life insurance and here’s why:

Today a term life insurance policy cost about one third less than it did a decade ago.

If you haven’t purchased any insurance before, now is the time to get a policy. However, if you already have life insurance you may want to compare the cost of your current policy to that of a replacement policy.

If your health is still good you should look into what a replacement policy would cost. You might be very pleasantly surprised.

Of course you should not cancel your old policy until you’re approved for a new one and made your first premium payment, but if you are approved your savings can be significant.

Here’s what I mean. Let’s say that in 2000 your significant other was a thirty year old male and purchased a twenty year level term policy with a half a million dollar death benefit. In other words the beneficiaries would receive a payout of half a million dollars if he dies before 2020. However, if after the twenty years he’s (hopefully) still alive the policy would expire and no one would receive anything.

About ten years ago the premium for that policy would have been about four hundred fifty dollars a year. Today, if the same person, who’s now forty years old, is still in good health he could get a new ten year level term insurance policy with the same five hundred thousand dollar payout for around three hundred dollars a year.

The cost of coverage goes up as a person gets older. However, because the premiums on term life insurance have dropped significantly, if the same person wanted to add an additional ten years to the coverage he could now get a brand new twenty year policy for roughly the same amount of money he is paying for his current policy.

Mike

Hi Mike,

I was wondering if I really need to have insurance for my entire life. We have young kids now, but will I really need it when they’ve grown up and have families of their own?

Michelle R.

Hi Roger,

Most people get life insurance when they want to make sure that their loved ones are well taken care of if something happens to them. For example, if you have young children an insurance policy will be able to make sure there’s a roof over their heads and pay for their education if you should pass away unexpectedly.

Life insurance can also be used to take care of your debts and mortgage as well as your funeral expenses. A life insurance policy can make sure that your family will not have to worry about paying for your final expenses or where their next meal will come from if you die. They will be better able to deal with the grieving process and hopefully it will make it a bit easier for them to move on with their lives.

Term Life Insurance Advice – How to Get Life Insurance on a Budget

As you mentioned, life insurance policies can be quite expensive. The annual premiums for a whole life policy are about ten times the premiums of a term life insurance policy that offers the same pay out to your beneficiaries.

Unlike a whole life policy a term life insurance policy does not build any cash value and you cannot borrow against it. You pay solely for the coverage it offers and that coverage is for a set amount of time. However, that’s exactly why the cost of term life insurance is a lot.

Realistically, most people need the coverage the most when their family is young. A term policy for five to thirty years may be exactly what you need.

How is the Cost Determined?

The primary factors that influence the cost of your insurance policy are your health and your age. If your health is poor or if you smoke you should anticipate paying more for your policy than if you are healthy. Also, the older you are the more you will pay for the same amount of cover.

But the biggest factor that determines your monthly premium is the amount of coverage you desire. As you mentioned, most experts recommend that you have enough coverage to take care of six to ten times your annual salary.

But if times are tough and if your budget dictates that you can only afford two or three times your yearly salary that is what you should get. Your family will be a lot better off with the equivalent of several years of income should you die than if they had no money coming in at all. You can always increase your coverage when you are on a more solid financial foundation.

Mike

Hi Mike,

I’ve been reading that life insurance coverage should equal ten years of my income. Things are kind of tight financially right now and I don’t think I can afford to pay for that much insurance. What do you recommend?

Thanks.
Roger L.

Hi Tony,

First, I hope things turn around for you.  But to answer your question, the bottom line is in order to maintain our coverage we must, of course, pay for our policies.  In a moment we’ll take a look at possible ways to deal with the situation. But first, let’s take a look at the process.

If you miss paying any premiums your insurer will contact you and advise you that they haven’t received your payment because it could be a banking error or an oversight on your part.

They’ll inform you that unless you pay your premium within your grace period  that your policy will automatically be cancelled.

The “Easiest” Answer – Pay Your Premium within the Grace Period

Most companies offer a thirty to thirty-one day grace period within which you can make your payment and not suffer any negative consequences whatsoever.  Even if you die within this grace period your beneficiaries will collect the death benefits.  The company will just deduct any premium that’s due.

However, if the grace period ends and you still haven’t made your premium payment your life insurance policy will lapse.

Some life insurance companies allow you to reinstate your lapsed policy within a certain timeframe.  But you will need to prove that you’re insurable, you’ll have to repay any outstanding loans you might have against your policy, and also pay all your overdue premiums and the interest that has accrued.

Even if they reinstate you your premium will probably be higher because you will be older.  In addition, if your health has substantially deteriorated your premium can be a lot higher.  And if your health situation is extreme you might be uninsurable.

A Possible Solution - Have Your Payment Withdrawn From Your Cash Value

You may be able to protect yourself against your policy lapsing if you own a cash value policy.

Just authorize your insurance company to withdraw the premiums from your insurance policy’s cash value if you miss any payments.  Of course this only keeps your policy active until your cash value runs out.

An Additional Solution – Protect Yourself When You Buy Your Life Insurance Policy

If you want to prevent the possibility of losing your life insurance coverage you might be able to add a “Waiver of Premium” option to your policy.  When you have this waiver, if you become unemployed or cannot work temporarily because of an accident or illness your insurer will take over the payments until you return to work (after you’ve contacted them to tell them what has happened).

Again, I hope you never need to use this information.

Best of luck,
Mike

Hi Mike,

The company I work for is struggling and they’ve been laying people off.  I’m afraid I’m going to lose my job soon.  What will happen if I miss any life insurance premium payments?

Tony

Dear Rachel,

I guess you came across some insurance premiums that look too good to be true.  I’m glad you’re asking yourself , “Why are these rates so cheap?”

The bottom line is that any insurance policy is only as good as the company you buy it from. If the fails your beneficiaries will not collect any money.  So your insurer’s financial strength is crucial.

Economic events over the past several years has hammered home the reality that well known, previously well respected companies can and do fail  Use a little common sense now and you can save your loved ones a lot of grief.

So, before you buy your life insurance policy there should be no doubt in your mind that the company you buy it from will be there to service it and pay your claim when you die.

In order to help you find the strongest and best companies there are a number of agencies that rate life insurance companies.  These insurance ratings companies are paid to have their independent analysts review a company’s financial strength.  They base their ratings on how financially sound the insurance company is based primarily on the quality of its investments and its overall fiscal fitness.

These independent ratings assess the insurer’s ability to pay its claims in a timely manner while meeting its financial obligations.  The five major insurance rating agencies are:  A.M. Best, Fitch, Moody’s, Standard and Poor’s, and Weiss Ratings.

Although the agencies vary a bit in their criteria, if you compare the ratings from the various agencies you will get a pretty good feel about the insurance company’s financial strength.  Of course you will want to buy your policy only from one of the strongest companies.

Here are the highest ratings these companies offer:

A.M. Best: A++ (Secure / Superior)
Fitch: AAA (Secure / Highest)
Moody’s: Aaa (Exceptional)
Standard & Poor’s: AAA (Extremely Strong)
Weiss Ratings, Inc.: A+

Before you buy your life insurance policy you can easily check the financial strength of the insurance companies you are considering online.   A simple search will give you the information you need to make an informed decision.

To put things into perspective, according to A.M. Best, the top rated insurance companies of 2009 are:

Geico: A++ (stable outlook)
Mass Mutual: A++ (stable outlook)
New York Life: A++ (stable outlook)
State Farm: A++ (stable outlook)

In addition, Stable A+ companies include Jackson National, John Hancock, Metlife, and Mutual of Omaha.

Hope this answered your question.
Mike

Dear Mike,

I’ve found some really low priced insurance online and I’m wondering why it cost so little.  Can you tell me how to know if I’m getting a good deal?

Rachel

Hi Margie,

There are a number of reasons people want to cash in their life insurance policies.  Why don’t we take a look at them and some of the choices you have?

You mentioned that you are considering getting a pay out from your life insurance company.  As an alternative, I think you should consider a settlement with an outside company.

A life insurance settlement is an option you have to sell your life insurance policy and relinquish your coverage to a third party.  It may be a better choice than getting a pay out from your life insurance company because it will often put substantially more money into your pocket.

Life insurance settlement companies are third parties that will give you cash if you want to sell your life insurance policy to them.  However, they have a number of requirements that have to be met before they will buy your policy.

First, your policy has to cost at least $100,000.  Some companies will only buy policies that are at least a $250,000.

You also have to be at least sixty-five years old.  However in most cases you will be eligible to sell your policy only after you’ve reached 70.   And finally, your health has to be normal.

Although it might look a bit complicated at first glance, the life insurance settlement process isn’t as complex as it seems.  None-the-less, you should have a trusted financial advisor help you through the process.  You will also have to decide which life settlement company or provider you want to do business with.

Initially you will have to submit all of your medical information.  Then you may be asked to take and pass a medical examination.  If your policy meets the necessary requirements and your medical information meets with their approval, you will receive a number of offers from the life insurance settlement company.

Go over these offers with your financial advisor in order to ascertain wh
ich would be the most beneficial for your circumstances.  Once you accept an offer and your life insurance policy is transferred you can receive the cash value.

Life insurance settlements are available to you whether you have term life insurance or whole life insurance.  There are two subcategories to consider.

Viatical Life Insurance Settlement

A Viatical life insurance settlement is often chosen by policy owner if they suffer from an incurable illness and need money for their medical care.

Senior Life Insurance Settlement

Senior life insurance settlements are designed for senior citizens who would like to have money for other investments.

Before going ahead with any settlement there are three things you should do to protect yourself.

1. Make sure that the broker or settlement company you are working with is licensed from an appropriate state government body.

2. Have your financial advisor go over all the possible risks and contracts available to you.

3. Have a clear understanding of the life insurance settlement process so that there is no doubt in your mind that you want to sell your life insurance policy.

I hope this helped and that you enjoy a wonderful retirement.

Mike

Hi Mike,

I’m about to retire.  The kids are out of the house and I’m thinking of cashing in my life insurance policy.  How can I get the most money for it?

Margie D.