Insure Your Most Valuable Asset – Part Two

We know now that the future income of a working adult is usually their most valuable asset. The one thing that their entire financial plan needs to have in order for the financial plan to work.

As a planner, I have to recommend that we design your plan to be successful under all circumstances, not just the one where everybody lives to old age.

This becomes more of a reality to me every year I get older as now I have seen or heard of my peers dying and have things like stents put into their hearts and bouts with cancer. It stinks, but it’s getting very real now for me.

There are two main questions:

What type of life insurance is good for me?

& how much do I need, if any?

Have your golden egg continue for your family.

The two types of life insurance are term/temporary and permanent, designed to pay no matter how long you live.

Term insurance is pure insurance in that you pay premium and your beneficiary collects the income tax-free death benefit if you happen to have a claim (die) while you own the policy. It is very inexpensive insurance. The reason is that you are VERY unlikely to have a claim. Since you have to be healthy in order to get a policy you are likely to have a very long life expectancy and outlive the term policy. If you don’t have as long of a life expectancy due to health condition(s) or your age,  insurers jack up the price or don’t offer you insurance at all. For example, I was recently declined life insurance because of a high PSA test score (turned out it was just enlarged prostate).

Think about this business model:

Offer cheap insurance to young health people. Don’t offer life insurance or offer at much higher prices to people that have life expectancy related conditions. The net result, the people that are more likely to die, don’t own policies. In fact, I have seen statistics that say that 98% of term life policies are not in place when people die. The issue with that, of course, is that it’s a shame since unlike other insurance, everyone will have one claim.

Are you on a relatively tight budget?

This is the way to go because you get of lot of income insurance for a relatively low cost. Term/temporary policies are offered with fixed level annual rates for periods of 1-30 years. The rates jump at each renewal period. They jump more substantially the older we get.

How much might term insurance cost per year?

Male, Preferred Non-Smoker

Your actual rate varies by company and is dependent on medical underwriting.

“Level” means you pay the same amount for that number of years. You’ll will pay much more to renew at the end of that period.

As I said, term insurance is ideal for tight budgets and for people that want a lot of income insurance, but don’t have a lot of extra money to spend on it. For those that are on track to leave their heirs with a financial legacy, having some permanent may be a good idea. A permanent plan of life insurance provides the a lump sum death benefit as well. It helps with the survivor’s dependent financial NEED  if the insured dies at an improbable young age while also staying in place to be used as a wealth transfer asset when they die closer to their life expectancy age.

You see permanent life insurance is really different than anything else with the word “insurance” in its name.

Life insurance is the only “insurance” that will, with certainty have a claim if you hang on to it. Therefore, permanent life insurance should be treated differently than other types of insurance especially if you can afford it and desire to leave a financial legacy.

There are several types of permanent life insurance, but they can all be designed to be in place whenever you die.

They differ on the rates of return assumptions, guarantees, internal expenses and mortality charges. This is where it gets extremely confusing. My personal favorite is relatively new and called a Guaranteed Universal Life. In my mind it works like a term policy guaranteed for my lifetime (up to age 120 is now an option) at a fixed annual premium. You can choose a premium such that it is paid off after so many years guaranteed.

I choose to pay my most recent policy off in fifteen years, but you could choose any number of years.  The faster you want to pay it off, the more you need to put in each year.

There is no stock market risk with this policy either and I like that for this particular part of my legacy.

You could use this death benefit as an asset to be transferred at my death, hopefully when I’m really old. I also have my favorite peace of mind rider (at a little extra cost). With this policy it allows me to take an advance of my death benefit if I end up with a qualified chronic illness. It allows me to take up to 4% per month from my death benefit tax-free. If I qualify for the chronic care benefit. The math for the chronic care benefit is simple for example with a $300,000 death benefit the insured could withdraw up to $12,000 ($300,000 x 4%) each month until they spent their entire death benefit. Whatever is not used is passed to the beneficiary at death. Nice to know I won’t be a financial burden on my kids if I get ill later in life.

Like any life insurance, it gets more expensive the older you get. Of course, you’ll pay in for fewer years the longer you wait (assuming you are still in good health).

I’ve had client’s in their 70’s purchase this insurance with the chronic care rider as a wealth transfer asset because they liked knowing the future value (death benefit). Keep in mind that the death benefit of all life insurance is income-tax free for the beneficiary.

The question is: should I have life insurance while I’m in my working years, the answer is only if you want to leave a larger financial legacy to your survivors?

If you are single with nobody financially impacted by your death then you have no “dependent need”. If you are single and hope or expect that to change than “no time like the present” could be something to consider. Knowing what I know about the time value of money I bought my first life insurance policy in my mid-twenties, without a wife prospect in the picture.

What if you have a family and care about them deeply. Why I don’t believe there is a “right” amount of life insurance for anyone in that situation.

I do believe you can get in the ballpark and feel good about the options you would leave behind. You see, your survivors would do just that, “survive” if you left them no life insurance. For most, however, the life choices they may be forced to make would be dramatic.

I like to think about it in terms of the “choices” you leave your survivors.

Would your spouse and kids have a choice but to downsize? Possibly pulling your kids out of their favorite school? Would your spouse have no choice, but to be on the prowl to find a new spouse that could financial support them and your kids? Would your kids be stuck with massive college loans or not be able to go to college at all? Are you giving your spouse the option to work or not?

“Would your spouse have no choice, but to be on the prowl to find a new spouse that could financial support them and your kids?”

So how much you ask? Well there are some calculators available online, but I would start by thinking about the monthly income you would want your spouse to have if you had checked out. You can figure that with or with a mortgage. If you decide to pay off a $200,000 mortgage with part of the insurance proceeds. Then your spouse wouldn’t need as much income, but you would add that mortgage payoff amount to your total need.

If you have minor children.

Your survivor would get a benefit from social security and you can look that up online here.  That goes away when they are eighteen.

As a lump sum income generator, imagine leaving your spouse a death $1,000,000 death benefit.  That money has to last them the rest of their life in place of your income.

They would probably invest that money pretty conservatively. So let’s assume they make 5% annual return, leaving them with 4% after tax or 40,000 per year from the $1,000,000 of life insurance.  Add that to the social security income. If they qualify and any of income they earn from work or other investments and that’s what they have to live on.

So, having a $1,000,000 life insurance policy is not exactly leaving your spouse with a glamorous lifestyle with abundant choices.

There’s no way to pick the exact amount of life insurance you should have.

It’s dependent on many things including your survivor’s income needs. Your desire to give them choices and your other resources for income including social security if applicable and other investment accounts that might produce income.

Comparison of types of life insurance

Same as whole life, but usually available at lower net interest rate. (i.e., pay the interest rate and get a credit back to the policy) This could result in a zero-net loan.Same as whole life, but usually available at lower net interest rate. (i.e., pay the interest rate and get a credit back to the policy). It could result in a zero-net loan. Same as whole life, but usually available at lower net interest rate (i.e., pay the interest rate and get a credit back to the policy) Could result in a zero-net loan.