Outside Economics

The question is often asked how much life insurance do I really need? It is different for each person; however there are some basic formulas and a rule of thumb that help.

A rule of thumb is typically developed after going through so many iterations and calculations that the rule becomes a basic truth. Calculating the amount needed for life insurance is no different, as over the years many individual needs analysis have been calculated that a rule of thumb has been developed and it is quite accurate. That rule is basically 10-20 times a person’s annual income.

Now when this rule of thumb does not work, is if there is only one bread winner in the home and the stay at home spouse has little to no income. The stay at home spouse still has significant economic value to the family. Another case where the rule may not work is in the case of insuring children. (See article about insuring children here.) Children have great economic value in a family, and should a family lose a child, that is a grievous experience to go through. Receiving a death benefit, would provide the money so the family could take the time needed to grieve; while not necessarily needing to go back to work right away to pay the bills for a funeral. 

To get a more accurate amount of the life insurance to buy, a needs analysis is performed with a simple formula which helps zero in on the particular amount for one’s circumstances.

First, let’s review the purposes of life insurance, generally there are three major reasons for it: 

1. Financial care for loved ones in case of premature death 

2. Pay for final expenses of the decedent

3. Provide liquidity for the estate (business buy out, estate tax burden, complete a project, pay off a certain debt, assist with retirement income, provide a charitable gift.)

What it should not be used for is to profit from the death of a loved one. Also a person must have an insurable interest in the person they are placing the policy on. 

The formula for developing the needs analysis is basically Income needs for however many years, plus expenses that will need to be paid, minus current assets, including current life insurance policies. I like to print out a form and work the numbers by hand, simply because it makes the process more real. You can download a . 

When I was a young adult my father passed away. He had a small life insurance policy, I am sure it was not much, simply because my parents could not afford much. But it was a great help to my mother when he did pass away. His policy did not pay for every little item we could have used or needed, but it did pay for several important cares of life, including his funeral expenses. I am the youngest in the family, and at the time of my father’s death I was in college, unmarried, and working part-time. My mother was a school teacher and getting closer to retirement. The value that small policy had on our entire family could not be calculated in simple financial terms, as it blessed our mother for years. Remember money is an emotional thing, its not just numbers. That peace of mind for my mother was incredible and I thank God for the agent who helped my father get the insurance. 

As you calculate your insurance needs don’t just look to the here and now, look off into the future as well. Needs can and will change over time. Many people these days find themselves raising grandchildren, thus putting them back in the position when they were young parents, affects their need for life insurance. 

These long-term needs should be covered with some permanent life insurance, while other short-term needs should be covered with term insurance. Often this can be - again a rule of thumb - approximately 20-40 percent of the total life insurance need. It is something that each person should consider and work with their agent to determine the proper amount in view of their long-term goals.

In the end, life happens and each person is left with needs and wants. We may not take care of all the wants, but each of us can make a serious dent in covering the needs with some form of life insurance - it is an inexpensive way to provide financial peace of mind for our loved ones.

REMEMBER:

"Gold is money, anything else is credit." ~ J.P. Morgan

Children are near and dear to most everyone’s heart. This week being Mother’s Day, I want to address the need for insuring our children - there I said it yes - the need to place life insurance on our children. Many will say that children do not need life insurance simply because they do not have an “economic value”, after all they are not a bread winner of a family. Perhaps there are some other reasons to insure your children (this also applies to grandparents insuring their grandchildren), lets explore a few.

When I was in college I remember an employer, who had five incredible children, tell me that every child is born with a bank account. There is always a way to raise a child. Many years later I would have to agree. My wonderful wife and I are the parents of six children whom we love and are proud of. They bring more joy into our lives than we thought could be possible. We hope they live long healthy lives. 

One quick lesson on life insurance. Insurance in general is based on risk that a particular event will happen - in the case of life insurance, the risk event is death. Because it is anticipated that we will all live a long life, the older we get the more expensive life insurance costs. This is for two reasons: 

1. We are potentially closer to death so the risk of dying goes up dramatically. 

2. The death benefit is funded by the reserves of the insurance company, which are built by many people paying premiums to the company. Even if you lived to be age 100, a person 55 years old would have a shorter period of time to pay the premiums into the reserves than a ten year old, thus requiring more premium. There are other factors at work as well, but these are two basic reasons it is inexpensive to insure children.

As adults, we do all we can to protect our children. Unfortunately, after all we can do, death can still happen. Children die for many reasons or causes: illness, automobile accidents, drowning (according to the CDC, it’s still the number one cause of death in children ages 1-4), and acts of violence, to name a few. I believe when parents have children, they look forward to a brighter future, thinking that their children are going to grow up and do something great. As parents we visualize our children’s beautiful wedding, college graduation, having children of their own, as well as their successful career. Back to some reasons to insure children:

Life Lessons

One reason to place insurance on a child is to teach them some of life's financial lessons. Many of these lessons are best taught while young. Teaching children about money and its uses in life can be enhanced with the added lesson of life insurance, what it is for, how it is used and the simple fact that life is fragile and we have an obligation to protect it. Sometimes these lessons may include a long-term vision of life and the expenses we may inccur throughout our entire life, in other words some expenses never go away. 

Child’s health

Life insurance is issued based on a person’s health. People must be able to prove they are of a certain health standard in order to be offered a policy. Most children are born very healthy and yet over time in their youth they develop certain childhood diseases that may cause simple to dramatic health issues later in life. These health issues can prevent them from obtaining life insurance when they are older and are a “bread winner” of their family. Or they may be able to obtain life insurance but it is dramatically more expensive due to the extra health risks caused by the ongoing disease. The healthier a person is, the cheaper their life insurance will be.

For example, one disease many children get is diabetes. According to the CDC, by age 20, 4.3 million people are diagnosed with diabetes. Any one disease can cause a policy to be issued at less than a standard rating, which cause premiums to go up. Many illnesses prevent children from obtaining insurance at all, simply because their risk of death is now too great.

By obtaining a policy when a child is young and potentially at their healthiest point in their lives is a wise move. The premiums on a ten year old are much less expensive than a 30 year old young married mother or father. With the right policy the premiums will never increase for the rest of their lives, from age ten to 100. This insures that they will have at least some amount insurance when they are older.

Economic Value

While children are not the bread winners, they do have economic value. After all parents invest a lot of money in their children, all with the idea that they learn through their education and extracurricular activities to be successful someday. I am in no means suggesting that the insurance is a way to profit from the death of a child - that is completely sick and wrong. What I am suggesting is that children do have economic value.

Once I was visiting with a friend a church, who happened to be a mortician. His funeral home had recently handled the death of a child and he mentioned to me that the worse part of his business was seeing a family go into debt to pay for the death of a child. His answer to that problem was that he wished every parent had insurance on their children. 

For parents the birth of a child and the death a child are both expensive. While you hope the latter comes much later in life, unfortunately for many it does not and when parents are grieving their loss to add the expensive burden of a funeral, that only adds to the grief.

Other Reasons

Families often ask: How to save for college? One method is with a permanent policy that builds cash value, those funds can be used to help pay for college expenses. A friend has paid for all three of his daughter’s college education from the cash values of his children’s policies. In this way the family is using their dollars very efficiently - while building cash reserves, they are also providing protection for their children. For every premium dollar invested there are multiple benefits that can be achieved.

Here is an example of a range of rates, insuring a child age 5 can be as low as $395 per year for a $100,000 death benefit. A 15 year old is only $637 for the same benefit. 

While this is a sensitive subject to discuss, I wish all children well and pray they have the best in all they pursue. I hope this information offers greater understanding about the value of life insurance for children. Insuring children while they are young and healthy, teaching them about financial literacy, helping them realize they do and will contribute to society, and helping them prepare and save for their future are great reasons to get them insured now. Considering the above - I think the question is: Why on earth would someone NOT insure their children?

If you have any questions or you would like  feel free to drop me a note. 

Remember:

"Little choices we make will be bundled together and show clearly what we value. Those choices will also show clearly what we are."  Boyd K. Packer

Demographics play a significant role in how much we spend and how we spend it.  Spending is primarily dictated by age where different needs and life essentials change and evolve as consumers grow older. For many families some financial obligations never go away.

Housing, transportation and food are the three largest expenses incurred by all age groups. These basic expenses often fit into the typical needs that many families have for life insurance. When looking at how much insurance to get people should consider an amount that will cover these expenses long into their future. People, even after retirement will still have these expenses.

These long lasting expenses should be covered with a permanent insurance policy, like whole life. Where the premium will remain level for your entire life. For example a base policy might be something in the area of $250,000 to $500,000 in coverage. Such a policy is much less expensive in a person’s younger years, making them very cost effective over the long term. 

As consumers move from their late 20s into their 30s, we earn more money and families start to grow. Expenditures on transportation, health care and entertainment become prevalent as households grow with children. These more temporary expenses would typically be covered by term insurance. When the financial need or obligation is completed the insurance can be dropped. This allows a family to be covered for the extra needs for vary little money, while at the same time maintaining their base whole life policy, which will provide the needed protection long after retirement.

As we earn more, we also tend to save more in our 30s, 40s, and 50s by contributing to 401k plans and retirement savings. At 75 years of age and older, our retirement savings start to reduce as withdrawals increase to replace lost earned income. Retirement savings is critical to your financial success. The life insurance is what secures the retirement savings. However, even with a large retirement account or pension, the basic need for insurance may not ever go away. How have you determined your needs for life insurance? With September being National Life Insurance Month - now is a great time to review your coverage.

There is the simple acronym: DIME with the meaning: D: Debts; How much do you have in outstanding debt obligations (excluding your mortgage)? I: Income; What amount of your income do you want to replace and for how long? Mortgage: How much would it take to pay off your mortgage? E: Education; What do you want to leave for your children and/or grandchildren for education expenses?

Now add these DIME numbers up and get the total. Subtract from the total how much life insurance you currently have in place and that is your current need. Typically, your current needs may range from 10-20 times your annual income, with up to about three to seven times your annual income as a base amount. Review the second paragraph up top to determine your very long term needs and see how this matches up.

 Sources: Social Security Administration, U.S. Census Bureau

Whatever excuses you may have for not buying life insurance now will only sound ridiculous to your widow!

 - Unknown Author

September is National Life Insurance month - let me guess, you did not know that we had a national life insurance month, few people do. Now is the time to make the public more aware of life insurance and its uses and benefits. There are two main questions people ask when talking about life insurance: How much do I need? and What type of life insurance should I have?

While those two questions are important, they are often answered like this: buy approximately five to ten times your annual income, and buy the cheapest term insurance you can get. In reality there is much more to those questions than that! After all, life insurance is a major part of your personal financial foundation, it is there to protect your greatest asset: You, Your Life!

When building a financial strength, a solid foundation is needed, a person starts with risk management and estate planning. These two elements never go away. For as long as you live you will need to manage the risks you and your assets are exposed to and plan for the disposition of those assets upon your death - when ever that is. 

Your assets consist of all the things you own: investments, bank accounts, home, vacation home, retirement accounts, automobiles, business assets, heirlooms, art, etc. The disposition of these assets becomes vitally important because if you don’t take the time to plan for their distribution, by law the state government, where ever you live, will tell your heirs how your assets will be divided.

Most people have all of their assets insured, certainly their home and its contents, bank accounts, and automobiles. Those are very important assets, and improper use of automobiles can cause serious injury to another person if an accident were to occur. So the amount of life insurance may fall into an easy answer of five to ten times your annual income, sometimes a proper needs analysis should be done to determine the right amount. So what about the type life insurance…

Many financial advisors and drive-by financial planners (the ones on the radio) often simply tell folks all they need is cheap term life insurance. They say never get whole life or any other type of cash value life insurance, because “its too expensive.” Or if you want to “invest” your money put it in the market. Another classic one is, the goal is to accumulate enough money so you can “self-insure your life” so you don’t need any life insurance.

Now don’t get me wrong I am a firm believer in term insurance and I think it is a tool to use in the right circumstances, in addition to their base or foundation policy, that being a solid cash value policy. Term insurance was never meant to be the bedrock foundation of a person’s financial structure. A foundation should last more than 10 or 20 years. How would that work if your contractor who built you a new house put in a term foundation, telling you the concrete in the foundation is only good for 20 years then it will expire and the house will fall down! Or in order to keep the house standing you will need to replace the foundation in 20 years.

That would be an expensive foundation. Replacing and/or buying a new foundation for a 20 year old house would be really expensive! A term policy is more like the roof - you know that will wear out and need to be replaced at some point in time. Yes, it protects the house but it is not the foundation.

As a practicing professional, I have visited with many people over the years who had purchased a cheap term policy when they were younger believing that it would serve their needs. That was it - no other insurance. Fast forward to when the term policy is close to the end of its life and the person still needs insurance. For what ever reason they did not accumulate enough to, as the drive-by’s would say, “self-insure”. Only now to get the same amount of term insurance is cost prohibitive, and they certainly cannot afford the same amount of coverage with whole life.  So they look at a reduced amount of death benefit. But now at their advanced age even a reduced amount is expensive. So that brings me to a question, that can be asked at any age: What is too expensive?  

Obviously expensive means different things to each person and in relation to life insurance that is all over the board. But what is “too expensive”? They say that term insurance is cheap - then what defines cheap? Maybe we should start with the purpose of life insurance. Life insurance first and foremost is for your family, to protect your loved ones or others from the economic hardship that will occur upon your death. It is not for the insured person, it is for the people they leave behind. 

This means that a person has an economic value. Typically that economic value is determined by the income a person produces, the debts they carry, and their estimated final expenses. At a minimum a person should leave the world debt free. A question is then asked: Do people have an economic value clear into retirement and even into their 80’s or 90’s? Yes they do. Remember the economic value is not for the insured who may be 85 or 90 years old; it is to help the people that person may leave behind. And those values can change and the people left behind may change over time too. But value is still there. And because there is value, there is a need for life insurance.

Now about the type of coverage, obviously the only good policy is one that pays a death benefit when a person dies. All other policies are not relevant. The premium to buy the policy may not be relevant. Only if the policy is in force and pays a death benefit is the policy of any value. 

Understanding that key element, a term policy may or may not be in force when the insured dies. It all depends if the insured happened to die within the term period and if the premiums were paid. The saddest thing is when a person dies shortly after their term policy expired or lapsed, leaving nothing for their heirs. There is a reason term insurance is so “cheap”, most policies never pay a death benefit. If more term insurance paid a death benefit, the premiums would be more expensive. 

In reality the most expensive policy is one in which a person paid on for years and years and then lapses before death and heirs never received a penny. Even the policies that cost only $50 per month, over a year that is $600 and over 20 years that is $12,000!

What about a whole life policy, it is more expensive? For the same policy that may cost someone $50 per month may cost $250 per month or $3000 per year. Yes that is true, however this policy will likely still be in force when the person dies and will actually pay the death benefit. Giving the heirs much needed thousands of dollars. Yes initially it costs more $50 vs. $250 but if the policy actually pays a death benefit and the other does not, which one cost more?

The amount of insurance you carry and the type of insurance you have are important particularly when you look out twenty, thirty, or even 50 years from now. I still have my first whole life policy I bought when I was 18 years old. It has served me very well and I have used it (the cash value) on several occasions, such as to purchase an automobile. It has been a solid part of my financial foundation and protected my family well. I bought that policy long before I ever knew that I would spend most of my professional life serving people in the financial sector and I am so grateful I did!

REMEMBER: 

"The only good life insurance policy is one that pays on death." Wendell Brock

In an effort to make life insurance policies more appealing and fit more of a family’s financial needs, measuring the risk, insurance companies have included insurance riders that cover terminal illness, critical illness, and chronic illness. The idea being, that the insured may develop an illness that causes great financial stress on a family, which could be covered by their life insurance. Should the person eventually pass away, why not accelerate the benefit a few years and pay something now? The policy rider may or may not be a great benefit.

These accelerated benefits, also known as “living benefits” are defined as follows:

— Chronic Illness: an insured is unable to perform two out of six activities of daily living, such as bathing or toileting, walking or transferring to or from a bed or chair.

— Critical Illness: an insured is diagnosed with a major illness such as cancer, heart attack or stroke.

— Terminal Illness: meaning a life expectancy of less than 12-24 months, depending on state limitations.

Acceleration of Benefits and Policy Maximums

These riders give you the option to access your policy benefits prior to death in the event of terminal or other life changing illnesses, when the need for additional funds may be crucial. This can be done either as a partial acceleration, meaning a part of your death benefit may remain in force, or a full acceleration. If you elect full acceleration, your policy will be terminated.

Generally there are limits on these policies, the maximum death benefit available for someone under age 65 is $2,000,000 and the maximum death benefit for those over age 66 is $1,000,000. The living benefit is based on the insurance amount; should you use the living benefit, you will not be paid the total amount of the death benefit.

How it works

If a 45 year old insured male becomes ill, for example with prostate cancer (common cancer for men), this person is insured with a ten year term policy for $1,000,000. The insurance company will look at how long the policy has been in force, age of the insured, type of illness, chance of recovery, policy death benefit, etc., they will look at everything related to this person and their current situation, then the actuaries will perform an analysis and make the insured an offer. This offer may be only a fraction of the total death benefit – maybe only $100,000 or less; or it could be more. Each person and their illness, stage in life, and how long the policy has been on the books are all considered when making the offer to the insured. In the end, it may or may not be worth it to give up the insurance policy for a living benefit.

Some policies state that they will pay up to 60% of the death benefit, some more, but the bottom line is that it all comes down to what the insurance company will offer considering all factors.

Typically, in the case of a terminal illness, the insured will get a higher pay out because it may be a matter of months until the insurance company will have to pay the full death benefit. The great advantage to this type of rider is for someone in business they can use the living benefit to help settle their affairs with their business partner(s) before death, leaving their heir(s) free of such complicated burdens. They may also choose to use some of the funds to travel or engage in other activities before they become too incapacitated by their illness.

While these benefits may be valuable for many people, they do not solve all the problems, nor replace the need for good medical insurance, long-term care insurance, life insurance or disability insurance. If the rider is used, the policy may be terminated and may end the possibility for a person to obtain additional life insurance in the future. The rider is an important extra benefit hopefully not in a position of last resort.

There are "stand alone" critical illness policies, which may be better for you for more information on the limits of thes policies, click below.