Evaluating Premium Amounts Based on Health Risks

In order to answer this question, you must first understand exactly how the life insurance industry works. In some ways the principles behind this industry are quite simple, while in other ways they are quite complex. The simple principles involve you and your life. Insurance providers have gotten very good at assessing how long they believe certain types of people will live. This allows them to collect premiums based on this factor in order to make their investment worthwhile. They are hoping you will live a long, healthy life, and continue to pay your premiums the entire time. Because of this reasoning, insurance companies tend to charge lower premiums for people they believe will live a long life, and higher premiums for people they believe are at a higher risk of dying sooner.

Investing Premium Payments and Profits Made from Insurance Companies

The complex principles involve what the insurance companies then do with the money they collect from their premiums. The companies invest their money in several different types of securities to further enhance their profits. When the company does have to pay a death benefit, they will continue to earn a profit even after the payout of the face value of the policy.

Profits with Term Life vs. Whole Life

This is precisely where term and whole life policies come into play. Since the companies make the most money paying out later rather than sooner, they implement very strict guidelines for their agencies and brokers to follow when selling the policies. These guidelines are determined by data collected from statisticians that are quite skilled at determining risk factors. Agencies then employ brokers who go out, interview potential clients, and assess their risk. People who are considered to be low risk for dying are often sold whole life insurance policies first because they cost more, and there is great potential for the insurance company to earn more money over the course of a lifetime. People who may be higher risk for dying at a younger age are also sold whole life insurance policies first as well. This again is due to the cost of the policy. If the insurance company may have to pay out sooner, they want to get as much out of their premiums as quickly as they can.

Deceptive Life Insurance Practices and Policy Decisions

While these practices may seem a bit cold and callous, it is important to remember that insurance is a business, and the people running those businesses are in it to make a profit. There has been a great deal of controversy lately regarding insurance company practices, and unfortunately many companies take advantage of unsuspecting people. To help protect yourself from unscrupulous companies, always fully research your options. Take your time when deciding on a policy and make sure it completely fits your needs and your budget. If you feel a lower priced plan is best for you do not be afraid to speak up and purchase what you truly want. In the long run, the insurance company will be happy to get your business, regardless of the price.

Life insurance is a very important aspect of financial planning that everyone should consider. If you are a new parent, it is especially important that you obtain some form of coverage to help protect your family in the event of your untimely death. Permanent life insurance can be a very good option that provides insurance over your entire lifetime and never expires.

Benefits and Protection with Permanent Life Insurance

While the cost of a permanent life insurance policy is more than other forms of insurance, permanent life insurance offers many unique benefits. The main benefits of these plans include:

• Permanent Protection: The policy is valid for the entire span of your lifetime and will not be terminated or expire as long as you pay your premiums on time.

• Builds Cash Value: Most permanent policies offer different savings or investment options along with basic coverage. These options help the account to earn money at either a fixed rate, or at a variable rate through stocks, bonds, money markets, or mutual funds. This savings portion allows the policy holder to build value that can be borrowed against if needed in the future.

• Policies Can Be Cashed In At Any Time: If for any reason you choose to cancel your policy, you can cash it in and receive back all of the money you have paid into your account.

• Tax Advantages: Permanent life insurance policies provide a benefit to your loved ones that is then tax free. The cash value that grows in your account while you are alive is also income tax deferred, and you pay no tax on your account unless you choose to cash it in early.

• Level Premiums: The cost of the policy does not change over time.

Permanent life insurance can be very beneficial to all parties involved. If you are able to pay slightly higher premiums now, you will be able to provide exceptional protection to your family in the future. If you need a policy with a large benefit to protect your assets, family, or even a business, permanent insurance may definitely be your best option. You will take a good amount of comfort in knowing that your plan is in place, and protection is guaranteed.

To help determine the answer to this question, it is first necessary to understand exactly what the adage means. Term life insurance is typically a significantly less expensive option than permanent life insurance. Because of this fact, many people believe that it is acceptable to opt for less expensive coverage that will just pay off basic bills and cover funeral expenses, and then invest the difference in premium amounts in accounts that will be left to loved ones. While this sounds good in theory, there are several issues that can arise.

Risks with Investing and Buying Smaller Term Policies

1. Difficulty keeping up with Investments: The first issue is that people often set out to do the right thing, and set aside the difference in policy amounts each month for investment. While some people have no problem doing this, others tend to “forget” to keep up with the investment, or scrap the idea all together and use the extra money for various everyday purposes. By paying a bit more upfront for a permanent life insurance policy, you not only get beneficial coverage, you also get an account that increases in value all in one package. This allows you to have the money automatically invested, provides you with a tax deferred savings account, and allows you to borrow against the value if needed.

2. Policy Expirations and Insufficient Coverage: Another issue that can arise from this practice is that people often do not realize they do not purchase sufficient term coverage, or that their policies may expire. This means you may inadvertently leave your family in a precarious financial situation. Permanent life insurance eliminates this concern as it does not expire. The beneficiaries do not have to pay tax on death benefits, and your estate will be fully protected.

3. Making Investment Decisions Independently: Finally, self investing your money can be quite risky. Especially in today’s economic climate, investments can fluctuate a great deal, and can quickly lose value. When navigating these waters independently risk greatly increases. When choosing a life insurance plan that does the investing for you, or even opting for a fixed rate growth account, the risk is minimized, and your money is safely tucked away for future use.

Always take a good deal of care when deciding upon a life insurance policy. You need to make sure what guidelines need to be followed, what your coverage limits are, and what the benefit will be for your loved ones. Make sure you keep track of expiration terms, and always keep up to date with your policy premiums, regardless of which type of plan you select.

Term vs. Permanent Life Insurance for Families

The debate over whether to choose term or permanent life insurance has raged on for years. Unfortunately, it is impossible to make a blunt statement that one type is definitely better than the other. Choosing a specific type of insurance depends on you, your lifestyle, your financial situation, and the amount of coverage you need. To help you decide what is best for you, below is a comparison of the two types.

There are also several different options under the permanent life insurance category including: Whole Life Insurance, Universal Life Insurance, Variable Life Insurance, and Variable Universal Life Insurance. These types of policies are broken down and explained below.

Life Insurance Plan Comparison for Parents and Families

Hopefully the process of purchasing your life insurance policy has become a little bit clearer. Remember, take your time and fully assess all of your options. Make sure you purchase enough coverage, and always keep up to date on your premiums.

Parental Responsibility and Life Insurance

Part of being a responsible, caring parent is planning for the future, and that includes planning for a future that may not include you. No one wants to think about dying, especially dying early, but the fact of the matter is, it does happen and if it does you want to insure your child will have everything he or she needs. Here are five main reasons why every new parent needs life insurance.

1. Factoring in Lost Income to Support Your Children: While the emotional loss of a loved one can never be measured, this loss can lead to serious financial repercussions. Life insurance helps to protect your family from having to deal with the sudden loss of income. The amount of the benefit you select will vary a bit depending on the age(s) of your children, however it should equal at least ten to twenty years worth of your current salary. If one parent stays at home with the children, he or she should also purchase life insurance because the work that parent does around the home is valuable. If something were to happen to the stay at home parent, it may be necessary to hire outside help, which can be quite costly. Life insurance can also help pay off any debt that has been accumulated, as debt will be passed on to the estate after death. You will want to make sure you provide for, and do not leave any burden to, your children.

1. Educational Expenses: Just as you want your children to attend good schools now, you will also want the same in the future. In the event of your passing, life insurance can help to cover education expenses to insure your children will still be able to attend private school and/or college.

1. Health and Illness Costs: Some forms of life insurance can help pay for any expenses you may incur due to a prolonged illness. These policies allow you to have access to a set percentage of your total benefit over your lifetime in the event you need care. This can be quite beneficial to both you and your family as you avoid many unneeded and unexpected expenses.

1. Tax Liabilities: Some life insurance policies offer the option of also purchasing estate tax insurance, which can be used to pay off all estate taxes at the time of your death. This can be a tremendous asset to your family as it allows them to acquire the entire estate without the worry of having to deal with the tax expense.

1. Expensive Funeral Costs: The payout from your life insurance policy can help to pay for funeral expenses. Funerals can be quite costly, so this extra money can be of great help to your family.

]]> http://www.cloudfi.com/resources/life-insurance/importance-of-life-insurance-for-new-parents/feed/ 0 http://www.cloudfi.com/resources/life-insurance/5-pitfalls-to-avoid-when-shopping-for-life-insurance/ http://www.cloudfi.com/resources/life-insurance/5-pitfalls-to-avoid-when-shopping-for-life-insurance/#comments Fri, 02 Apr 2010 19:17:21 +0000 George http://www.cloudfi.com/resources/?p=1080 The process of shopping for life insurance can be very confusing, depressing, and downright unpleasant. Most people hate doing this because they simply do not know where to begin or how to make sure they have gotten the coverage they truly need. Before starting the shopping process, you should be aware of the five most common mistakes people make. By learning what to avoid, you will know exactly how to narrow your choices in order to get the best policy.

1. Not Buying Life Insurance: Avoiding The Subject Of Life Insurance Completely: Life insurance is a topic that no one likes discussing. The thought of dying is simply not one people handle well. Since life insurance is not mandatory, as is the case with other forms of insurance, it is often easier to just avoid it all together. However, especially if you have dependents, you need to get coverage to protect them in the future. The last thing you would want is to leave a horrible financial burden to your loved ones in the event of your death.

2. Getting Too Much or Too Little: While some coverage is always better than no coverage, if you are going to shop for a policy, it is important to make sure you get enough insurance. Most people who have a plan only have enough insurance to cover basic bills and funeral expenses. You will need to have a policy that will replace the loss of your income, in order to keep your family secure.

3. Getting the Average Policy Amount without Factoring in Your Situation: Figuring Your Coverage Based Upon “Rules of Thumb”: It was once considered acceptable to figure your life insurance coverage based on the “seven times income” rule of thumb. Today, this simple calculation is not practical as everyone has a different financial situation. For example, if you are a single parent with four young children, you will need to get much more coverage than a young couple that has only one child. It is always a good idea to sit down and make a list of everything you need to protect. Factor in everyday bills, the cost to pay off your mortgage, the cost to send your children to college, and even a little extra to help provide a financial cushion to your loved ones.

4. Not Factoring “Non-Monetary” Income: Non-monetary income can be a huge part of daily life. This type of income typically is comprised of benefits from a job (such as health insurance or retirement accounts). In the event of your death would your spouse still have health insurance? Would he or she have enough money to retire on? These factors need to be figured into the value of your insurance plan.

5. Not Knowing Coverage Terms: Many people often purchase a plan without really knowing what they are buying, or figuring how long the plan really needs to support surviving family members following their death. For example, if you have only one child who is currently ten years old, it is likely that the child will be out on his or her own in eleven years. In this case, you would only need a term policy that is set up to support for those eleven years. This can narrow your choices down a great deal, and even save you some money.

Umbrella insurance refers to a liability insurance policy that protects your assets and future income beyond the standard limits in your auto and homeowner’s policies.  It’s an umbrella because it  covers liability claims from all policies underneath it, such as autos and homeowners policies.

For example, if you have an auto insurance policy with liability limits of $500,000 and a Homeowners policy with a limit of $300,000, then with a million dollar umbrella, your limits become in effect, $1,500,000 on the auto policy and $1,300,000 on a homeowners liability claim.

It also covers other liabilities such as the following:

• Libel
• Slander
• Invasion of Privacy

Why do I need it?

1. Your automobile liability coverage may not be enough in a lawsuit.  Most people have a $500K limit on their automobile liability insurance.  The average payout in personal injury lawsuits can often be much higher. ( ie. Average award in Florida – $1,819,751, Average award in Michigan – $1,089,638)
2. Your homeowners or renter’s liability coverage may not be enough in a lawsuit. Most homeowner policies are capped at $500K.  Again, this may not be enough if an uninvited visitor to your home suffer an accident.
3. You are self-employed. Your homeowner’s policy does not always cover activities that relate to self-employment.  An umbrella policy will provide that extra coverage here.

For more background, read the a recent NY Times article on the topic.

What to look for?

Umbrella liability insurance is much less that most people assume.  Here’s a general rule of thumb which can vary based on your individual situation.

• First $1M: $150-$300 per year
• $2M – $9m: An additional $150/year for each $1M in coverage.
• $10M or greater: Depends on your insurer.

You’ll want to find an insurer that has a number of other clients with your net worth profile.  If that is the case, they will have a larger risk pool to work with and your rate will generally be lower.

How do I get it?

Start with your auto or homeowner’s insurance company.  Typically they are more than glad to provide you with such a policy.

If you find that the premium is costly or you don’t qualify for some reason, try shopping your automobile, homeowners or renters and umbrella policy to other insurers via a broker.  We’ve provide some leading online brokers below.

• NetQuote: BBB Accredited.
• InsWeb: BBB Accredited.  Recommended by Forbes and Kiplingers.
• Insure.Com: BBB Accredited.  Forbes Top Pick.

For example, a 30-year term life policy for a 33-year-old man may cost $939 in annual premiums, compare that to $11,290 for a whole-life policy.  So instead of choosing the whole-life, he invests the $10,351 annual difference in a portfolio with a net after-tax return of 5.19%.  In 30 years, the invested money grows to $746,997.  However, if you still need coverage after the term-life expires, the annual premium might be something like $29,589.

Professionals disagree on which option is better.  Some argue that “buy term insurance and invest the difference” does not work so well when the market craters, like last year; but I think that really depends on how you are investing that money.  The way to think about it is what does the insurance company do with my money when I buy the whole-life?  They go and invest it in conservative instruments to match their long-term liabilities, not in a 80% equity portfolio.  We can do the same.

In fact, to make things simple, buy term (ladder them if expect expense needs to change over time) and invest the difference in a target date fund with the same date as when the term-life policy expires.  Hopefully you will be smiling happily to know 10, 20, or 30 years from now that you’ve pocked the compounded difference instead of your friendly insurance company.