Life 101
Regardless of how much you buy and what it covers, the purchase of any type of insurance is to mitigate risk of financial loss. When someone purchases homeowner’s and/or auto insurance, they are protecting against the risk of financial loss from such things as fire, accidents and any ensuing liabilities. The purchase of Life Insurance and/or Disability Insurance is no different… again, protecting against the risk of financial loss. However, with Life and Disability insurance, you are covering a person’s life and livelihood providing a family with the comfort of knowing they will be able to survive financially if you are not able or around. Here is some information on each that will enable you to better understand they may or may not impact your life.
Life insurance is available under many names and can have many frills, complications and purposes, but they all offer only two basic alternatives: Term Insurance and Cash-Value Insurance. These two types are similar in some respects, but different in many others. Here are the basics of each:
Term Insurance:
A term insurance policy insures your life – Pure and simple…In fact, it’s often referred to as “pure insurance”. You pay a premium for a designated period of time, generally between one and twenty years, and if you die, your beneficiary receives the insured amount. If you live and want to continue your coverage, the policy must be renewed.
Cash-Value Insurance:
This is insurance that remains in effect, not for a specified period of years, but rather until you discontinue it, or until its benefits are paid out. In addition, part of the premium you pay is set aside for you in what amounts to a savings account that earns a dividend. This money belongs to you whether you keep the policy in force or not.
An overlooked feature of life insurance are the following: Upon death, the insured’s beneficiary will receive the “death benefit” in cash, free from any income tax, and the proceeds can be used for any purpose.
While there are a wide variety of reasons why someone should consider the purchase of life insurance, the primary reason is indisputable. If your death will create a financial hardship for someone, family or others, you need life insurance. That’s the easy part. The difficult part is quantifying the financial hardship. This is best done by defining the financial needs in the following categories:
Immediate:
This would cover the first six months or so and would include such expenditures as:
- funeral costs
- final healthcare bills
- taxes
- attorney fees
- current monthly obligations
- grieving comfort
This six month period is somewhat subjective since it attempts to cover the families grieving and emotional struggles caused by the loss of a loved one.
Intermediate:
This would cover the period of time until the children can survive on their own and would include basics such as:
- food
- shelter
- clothing
- healthcare
- insurance
- taxes
- education
This category is reasonably predictable in that the expenses can be calculated for a specific number of years related to the current ages of children and expectations of when they will be on their own.
Long-term:
This would cover the surviving spouse after the children are on their own and would include most of the items addressed in the Intermediate category, albeit in lessor amounts:
- food
- shelter
- clothing
- healthcare
- insurance
- taxes
- retirement
While this category is reasonably predictable as to the monthly expenditures, it is difficult to predict how long they will need to last. Nowadays, it is very common for seniors to live well in to their nineties, making it more difficult to estimate the amount of funds needed for peace of mind.
The variables that can and will impact the actual expenditures in each of the categories are many and varied; no one can be expected to estimate the correct number with any degree of precision. Additionally, over time, you can expect your need for life insurance to change. But fortunately, the cost for protection can be a bargain, allowing you to provide adequate coverage for your changing needs without breaking the bank.
Examples of Life Insurance
There are many, many reasons to consider life insurance. Here are a few of the most common:
- Burial and other final expenses— Costs within this category can easily amount to $10,000-$20,000.
- Peace of mind— Knowing others will not have to be responsible for debts you incurred or expenses incurred on your behalf.
- Lock in a low premium at a young age— Premiums for life insurance can easily double between ages 23 and 45
- Provide a nest egg for your future and/or unexpected emergencies— The cash value feature found in a variety of life insurance policies is easily accessible when needed for any purpose.
- Income replacement— Proceeds from a life insurance policy can replace lost income from the insured due to death.
- Provide funds for college— Proceeds from a life insurance policy are not restricted in use so it is a perfect solution to insuring that college funds are available to the family in the event of the premature death of the breadwinner. On the brighter side, a properly selected cash value policy will have funds available to the policy holder as a loan.
- Mortgage protection— The right term decreasing term policy will pay off the family’s mortgage at the untimely death of the breadwinner enabling the family to remain in the home
- Supplement your retirement plan— The potential build-up of cash value from a life insurance policy during your working years can be used as supplemental income during your retired years.
- As a tool for estate planning— You can transfer more wealth to your family if a life insurance policy is part of your estate
Each of the examples in this section will provide you with different family dynamics from: single, married without children, married with children, empty nesters and retired. Each example will address the 10 most common reasons for considering life insurance and place them in one of three categories:
- Reasons for coverage
- Reasons to consider coverage
- Too soon to consider coverage
You will see that each of the different family dynamic scenarios will categorize the most common reasons for purchasing life insurance differently. The rationale for this along with some additional commentary will be provided in the Overview section.
Scenario:
- Single, age 23,
- Recent college graduate, earning $40,000 per year
- No dependents
Reasons For Coverage:
- Burial and other final expenses—Costs within this category can easily amount to $10,000-$20,000.
- Peace of mind—knowing others will not have to be responsible for debts you incurred or expenses incurred on your behalf.
Reasons To Consider Coverage:
- Lock in a low premium at a young age—premiums for life insurance can easily double between ages 23 and 45
- Provide a nest egg for your future and/or unexpected emergencies—the cash value feature found in a variety of life insurance policies is easily accessible when needed for any purpose.
Too Soon To Consider Coverage:
- Income replacement—Proceeds from a life insurance policy can replace lost income from the insured due to death.
- Provide funds for college—Proceeds from a life insurance policy are not restricted in use so it is a perfect solution to insuring that college funds are available to the family in the event of the premature death of the breadwinner. On the brighter side, a properly selected cash value policy will have funds available to the policy holder as a loan.
- Mortgage protection—the right term decreasing term policy will pay off the family’s mortgage at the untimely death of the breadwinner enabling the family to remain in the home
- Supplement your retirement plan—the potential build-up of cash value from a life insurance policy during your working years can be used as supplemental income during your retired years.
- As a tool for estate planning—you can transfer more wealth to your family if a life insurance policy is part of your estate
Scenario:
- Single parent, age 27
- 2 dependents, ages 3 & 6
- earnings $75,000/yr
Reasons For Coverage:
- Burial and other final expenses—Costs within this category can easily amount to $10,000-$20,000.
- Peace of mind—knowing others will not have to be responsible for debts you incurred or expenses incurred on your behalf.
- Lock in a low premium at a young age—premiums for life insurance can easily double between ages 23 and 45……..a $1,000,000, ten year term policy for a male aged 27 can be as low as $150 per month, while the same policy at age 37 would cost approximately $300 per month.
Reasons To Consider Coverage:
- Provide a nest egg for your future and/or unexpected emergencies—the cash value feature found in a variety of life insurance policies is easily accessible when needed for any purpose.
- Income replacement—Proceeds from a life insurance policy can replace lost income from the insured due to death.
- Provide funds for college—Proceeds from a life insurance policy are not restricted in use so it is a perfect solution to insuring that college funds are available to the family in the event of the premature death of the breadwinner. On the brighter side, a properly selected cash value policy will have funds available to the policy holder as a loan.
- Mortgage Protection—the right term decreasing term policy will pay off the family’s mortgage at the untimely death of the breadwinner enabling the family to remain home
Too Soon To Consider Coverage:
- Supplement your retirement plan—the potential build-up of cash value from a life insurance policy during your working years can be used as supplemental income during your retired years.
- As a tool for estate planning—you can transfer more wealth to your family if a life insurance policy is part of your estate
Scenario:
- Married:
- Wife—age 25, college graduate, earning $75,000 per year
- Husband—age 26, college graduate earning $60,000 per year
- No dependents currently but planning to have 2 chilkdren by age 33
Reasons For Coverage:
- Burial and other final expenses—Costs within this category can easily amount to $10,000-$20,000.
- Peace of mind—knowing others will not have to be responsible for debts you incurred or expenses incurred on your behalf.
Reasons To Consider Coverage:
- Lock in a low premium at a young age
- Provide a nest egg for future or emergencies
Scenario:
- Married:
- Husband—age 35, earning $90,000 per year
- Wife—age 34, part time earnings of $25,000 per year
- Two children:
- Girl—age 3, in preschool
- Girl—age 6, in first grade
Reasons For Coverage:
- Burial and other final expenses—Costs within this category can easily amount to $10,000-$20,000.
- Peace of mind—knowing others will not have to be responsible for debts you incurred or expenses incurred on your behalf.
Reasons To Consider Coverage:
- Lock in a low premium at a young age
- Provide a nest egg for future or emergencies
Scenario:
- Married:
- Husband—age 55, earning $100,000 per year
- Wife—age 53, earning $125,000 per year
- No dependents—their three children are ages 23, 27 & 30 all married with plans to have at least two children by age 35
Reasons For Coverage:
- Burial and other final expenses—Costs within this category can easily amount to $10,000-$20,000.
- Peace of mind—knowing others will not have to be responsible for debts you incurred or expenses incurred on your behalf.
Reasons To Consider Coverage:
- Lock in a low premium at a young age
- Provide a nest egg for future or emergencies
Scenario:
- Married:
- Husband—age 65, earning $85,000 per year
- Wife—age 62, retired
- No dependents
Reasons For Coverage:
- Burial and other final expenses—Costs within this category can easily amount to $10,000-$20,000.
- Peace of mind—knowing others will not have to be responsible for debts you incurred or expenses incurred on your behalf.
Reasons To Consider Coverage:
- Lock in a low premium at a young age
- Provide a nest egg for future or emergencies
Comparisons of Life Insurance
There are fundamentally only two types of life insurance available to satisfy your needs. They come under many names and have many frills, complications and purposes, but they all offer only two basic alternatives. They are Term Insurance and Cash-Value (often referred to a Whole Life) Insurance– similar in some respects but different in many others. The costs vary dramatically based on a number of factors. In this section, you will be provided examples illustrating the relationships between coverage types and premiums, for men and women, young and old, healthy or not.
How Do Premiums Compare Between Term Life and Whole Life Insurance?
As you will see there is a substantial difference in premiums between Term and Whole Life and the difference is primarily the result of the potential cash –value component found in some insurance policy. A Term Policy does not have a cash-value component directing premiums to pure insurance coverage while premiums for a Whole Life Policy are directed to pure insurance and a cash account that earns interest and accumulates tax free.
Conclusion:
No surprise here, the differences are substantial, very substantial. However, this is a comparison between two very different products both of which provide the vital element of life insurance protection. What’s important is to evaluate the advantages and disadvantages of each as they apply to a specific situation. In other words, what’s best for one family may not be for a different family.
Do Life Insurance Premiums Vary Between Males And Females?
Yes they do and the differentials might surprise you. This is not a discrimination issue on the part of an insurance company. Essentially, insurance companies employee actuaries to analyze past death rates and correlate the findings to create “Mortality Tables”. These tables are usually prepared separately for men and women and take into account factors such as occupation, recreational activities, social activities etc. These tables are used to determine life insurance premiums.
Conclusion:
Hmm. Proof positive that it pays to be a FemaleJ.Actually, according to the World Health Organization, men in the United States have a life expectancy of 75.9 years, while a woman’s life expectancy is 80.5 years. This 4.6 year differential in life expectancy between men and women creates the differential in premiums reflected above.
Should You Purchase Life Insurance Now or Wait Until Later?
Below you will see that the cost of life insurance, irrespective of the type of policy chosen, will never be lower than it is today. However, that in and of itself is no reason to purchase a life insurance policy. The reason to purchase should be based on a need. That need should either exist today or have a strong likelihood that it will exist in the not too distant foreseeable future. Here is a chart that will help you understand potential benefits of purchasing sooner than later.
Conclusion:
It is pretty evident that purchasing life insurance sooner rather than later is beneficial. But again, without a need you would likely be wasting some money. However, there is another reason that is often overlooked for purchasing life insurance sooner rather than later and that relates to insurability. As you age, the likelihood that you will develop an illness or even a disability that will cause an insurance company to rate you as uninsurable increases could prevent you from purchasing a life insurance policy when the need arises.
Are There Benefits of Being Healthy When Purchasing Life Insurance?
Of course there are benefits of being healthy anytime. But it certainly pays to be healthy when you are shopping for life insurance. When you apply for life insurance you are typically subjected to certain underwriting guidelines that seek to determine the risk of your early death. Essentially, the healthier you are perceived to be the longer you’re expected to live. Conversely, an unhealthy person is likely to die sooner than a healthy person. The life insurance industry typically uses four risk categories when evaluating the risk characteristics of an applicant. They are: Preferred Risk, Standard Risk, Sub-standard Risk and Uninsurable Risk. The comparison below illustrates the premium differential between Preferred Risk and Sub-Standard Risk.
Conclusion:
Plain and simple, as evidenced by the comparisons above it pays nicely to be healthy when purchasing life insurance.
Is There Life Insurance That Pays Off a Mortgage Upon Death?
Not exactly but you will be happy to know that the industries Decreasing Term policy suits the objective very nicely. The features of this type of policy that enables it to work efficiently are: it has a fixed premium for the term of the policy and the death benefit decreases each year closely mirroring the amortized balance of a mortgage.
Conclusion:
This may be the best “no brainer” in the industry. It is so affordable that coverage can be provided for both parents. The benefits of “peace of mind” knowing if one parent dies prematurely, the family can continue to live in their home not having to worry about a mortgage payment is off the chart.
Can I Afford a $1,000,000 Term Policy?
A term insurance policy insures your life and that is all it does…Often referred to as “pure insurance”. You pay a premium, pay that for a designated period of time generally between one and twenty years and if you die your beneficiary receives the insured amount. If you live beyond the term and want to continue your coverage it must be renewed. These features are what make a basic term policy one of the best values in the industry making it very affordable to most people.
Conclusion:
While the term policy has a wide variety of applications within a family’s overall financial plan perhaps its most appealing feature is the cost/value relationship. The relatively inexpensive cost of this type of “pure insurance” can enable a family to provide for the funds to maintain a familiar family lifestyle in the event of an untimely death of the breadwinner. It is practically a “must have” for a married couple with children.