Monday, September 24, 2012

What Is Your Type?

In my last post, I said that I would provide some guidance and education on the life insurance options that are readily available and easiest to understand for people looking to make their first purchase or for those looking to subsidize their existing life insurance portfolio.

The outline will be simple and I will give some advice on each.

Here we go:

1 - Term Life Insurance - You see this stuff everywhere. If you've ever seen an ad on TV or gotten a flyer in the mail, it is most likely a GREAT rate for more life insurance than you thought possible for so little money.
THE GOOD: Term serves the purpose of insuring a block of time where you feel you are leaving others at the greatest risk should your untimely death occur. For example, if you are a parent raising children...let's say you have a 5-year-old and a newborn baby in your home. I always look at the youngest child to determine the amount of time you should consider in the child-raising period (in this case, the newborn). Most of the main term policies come in 10, 20, or 30 year options. With a newborn you may be hoping for college and such so a 30-year option is the safest policy based on that timing because chances are you will be raising that child past the age of 20. However, you will most likely not be raising that child for their life span and so the need to have a safety net after they have grown and gone and started a life of their own diminishes greatly.
Term is equal to time. You are wrapping a bubble of protection around a portion of the timeline of your life to cover a tragic and premature incident so that your family can continue (at least for a time) on the financial path you set out for them when it all started.
THE GAMBLE: So many people see the small premiums of a term policy and they get all excited that this will certainly be all they will ever need. Term is the insurance company's big "Gotcha". The people who look at something called a mortality table look at every number needed and every risk factor possible to assume the risk the person taking insurance out has the potential to be. Your individual situation helps determine rate and longevity of your life span. Most of us land in the "safe zone" and so to charge a small premium for the next 20-30 years is a no-brainer from their standpoint. The insurance company looks at you and basically says that unless something unforeseen happens, the life insurance payout will never happen and you will live long past the life policy's term. You're basically "renting time" for a BIG what if. The insurance company gets all those premiums from you for the next 20-30 years and never pays out a thing. CHA-CHING! Then they turn right around and send you a reminder notice that you are about to live past your term, you are now 20-30 years older which means all your life premiums just went through the roof for you to acquire again. What was once a $20.00 per month policy is now a $50 or $100 dollar per month policy for the same death benefit.
WHO NEEDS IT?: Essentially any person who has people in their lives who count on them for something is in need of some form of additional term life insurance. Parents, relatives, spouses, and home owners all have either certain financial responsibilities or desires to someone least for a time period. That time period is where term comes in and sets up a chance to get more financial gain to the beneficiary at a time that has been determined to be more important and more crucial than at other times.
WRAP UP: At some point in everyone's life, term life insurance is a necessity. To be able to leave behind the financial hopes, dreams, and/or responsibilities in the event of an untimely death is a huge benefit. A mom or a dad can insure a college education, that first car, paying off the home so loved ones can still live in it, the son or daughter who wants to be sure an aged parent continues to have quality care...the list goes on and most of us will have a block of time where we are at the greatest risk. Term life is there to help. It is not the only means if insuring your life or the expenses you might leave behind, however.
The next type I will discuss is a permanent life policy.

2 - Permanent Life Insurance - Permanent life insurance is still being left to a beneficiary, but this is the stuff that stays with you long into life and will most likely be the type of life insurance you pass away with...if you planned ahead and planned early. The biggest benefit of permanent life insurance is the locked rate based on age and health at the time coverage was issued. In other words, you get this when you are young and you are not penalized for getting older, and sicker, or just succumbing to the things that happen in life as we age. Permanent life looks at each person and reminds us that we will all pass away at some point. That is unavoidable. Whether we die now or when we are in our 90s or more remains to be seen, but permanent types of life insurance will be there for us throughout and will assist our families with the final expenses associated with our final day.
THE GOOD: My own example is the best one I can come up with to show the need for considering this life insurance. When I was but 2-years-old, my dad bought a small whole life insurance policy on me. When I turned 3, I was diagnosed with a kidney disorder. Now, I went until I was 16 with this issue and was medicated for it for most of my growing years. When I became an adult, my dad signed the policy over to me and told me about it. It wasn't a large policy, but it was enough for final expenses and it had actually grown over time (I'll explain this in a moment). I paid on that policy every month from that day. It was the same premium as my dad had started off with when I was 2, so it was affordable and useful. I found out exactly how useful when I attempted to get my own life insurance after I had gotten married. Because of my medical history, I was a higher risk and many companies would not even consider me for larger amounts of coverage. It's the sad fact of life insurance...if you are too risky for their big "GOTCHA" on term, you just don't get it or they ramp your rates up so high it gets ridiculous. The end of the story is this...with my dad's thinking on this when I was young, I will always have a policy I know will be there and will remove the concern of final expenses from my family's mind because I have that covered. At $13.00 a month, that's a reasonable amount to pay for piece of mind, don't you think?
Now, I mentioned this policy had "grown" over time. Another good part of these types of policies is the cash value that accumulates over the length of the policy. This money can be withdrawn, reinvested, or in some cases it adds to the face value of the death benefit (like in my case). Since it will not get cheaper to bury people, the fact that it continues to grow is a nice option that tells me that I am also planning for a long and healthy life without having to worry about if what I got when I was 2 will be enough when I am 90. Since it grows each year, I know I've left enough for my family for that final day and that funeral home bill.
THE "BAD": While my scenario makes sense, so many people have gone years without any form of life insurance. They may have health conditions now or their rate to acquire permanent life insurance may be out of their budget. Permanent life insurance is always more expensive on the front end (or at least it seems that way). If you did a comparison of premium cost between term and permanent life insurance, the permanent life would be almost 4 times more than what term would be (depending on age of acquiring it).
Many financial advisors will also tell you to take the difference in premiums between term and permanent and invest that money so that at the end of the term policy, you have your own life insurance money set aside. This is a great plan, but requires discipline on the individual's part to make that happen. It does make sense and would save someone quite a bit in terms of premium dollars over time.
WHO NEEDS IT?: In my opinion, life insurance is the only kind of insurance guaranteed to pay someone something at some point. You can have all the car insurance, or home owner's insurance, or whatever and never have a claim paid. Death is guaranteed and if you hold life insurance at your death, it's guaranteed to pay as well. So to answer the question...we all need it. Obviously, the earlier the better is the best way to plan but the key is that on your last day there is something there to pay for the final expenses that will be expected to be paid to a funeral home for your final resting place. It's expensive to die, and you are the only person who can really help cover that cost so your family does not have to. I can't imagine paying back a loan for a funeral. I would just as soon not be reminded of my loss every month for the next 5-10 years.
If you live to a ripe old age, this policy is for you. If you are a single 20-something with very little debt or responsibility right now, this policy is for you. If you are getting term insurance at the beginning of a life with others around you counting on you, this policy is for you.
This type of policy can also be for the person who was not able to set aside their own funds each month for their own life insurance and now they have some health issues or just need enough to be buried with. Many times a permanent policy goes easy on the underwriting requirements. In some cases it's as easy to acquire as signing your name. I'm not a fan of people waiting that long and it can be expensive, but it's good to know that the option is there.
WRAP UP: Unless I'm super devoted to a financial plan and I have enough funds to put aside for my own life insurance AND I have no unforeseen issues in 20-30 years that will require large sums of money I may have squirreled away, then acquiring permanent life insurance as early as I possibly can will help me and my loved ones know that if nothing else, the final expenses of this life are covered.

I hope this has helped as you continue to search for the best way to protect you and your family. There are hybrids and options to life insurance policies, but these are the main two to consider.

If I can be of any assistance in any sort of advisory capacity, I am always available at 205-370-8453 or you can email me at

PS - I usually leave a video of some kind at the end dealing with the post I have just written. This one is a little tough to do that with, so no video for this one.