Who Needs Life Insurance Anyway

Not normally the subject of water cooler talk, life insurance has been getting some attention lately as premium rates have been falling dramatically. That positive news comes against the backdrop of rather disconcerting report that one in three adults doesn’t own any life insurance. Granted, a large percentage of these adults are post-teens, recent college grads, and young adults many of whom can’t even imagine why they might need life insurance, so it’s not a subject to be discussed. Given the opportunity, however, to thoughtfully consider the question, “Who needs life insurance anyway?” even the “invincible” among us may consider differently.

Most Americans Know they Need It

For the two-thirds of adults that do own life insurance, their reasons are clear. Protecting their families against potential financial devastation due to the loss of a breadwinner is far and away the primary reason they buy life insurance. While this is their stated financial rationale, most people draw from a more deep rooted purpose linked to their devotion to their loved ones and their sense of responsibility to ensure that their survivors be able to live in the manner to which they are accustomed. For them, life insurance is an emotional purchase that provides all concerned with peace of mind.

There are also a growing percentage of adults who buy life insurance for more practical reasons. More and more people are starting family enterprises, businesses that provide current income for families as well as a legacy of financial security for future generations. Business owners are buying life insurance to ensure that their business will survive even in the event that the owner, a partner or a key employee should die prematurely. Life insurance provides the capital liquidity that businesses need to keep it going, buy out a deceased partner’s interest, or replace a key employee.

Many Don’t Know that They Need It

That still leaves millions of Americans who don’t own life insurance, or who have inadequate coverage to provide for the financial security of their families. While their reasons may be clear to them, their logic may not hold up to realities that most people face even if they are young, healthy and without family responsibilities. The fact is that the cost of life insurance has dropped so much in the last decade that a $500,000 policy can be purchased for less than the cost of twice-weekly Starbucks coffee for a healthy 25 year old. While that may not be incentive enough young adults to run out and purchase life insurance, there are plenty of other reasons why they should.

Health is a Fickle Thing

Many young adults are health conscious spending a fair amount of time exercising while watching their intake of unhealthy foods. But as people grow older, they tend to spend less time on their fitness, and their diets often run afoul of healthy guidelines. It is simply a function of the time that people are able to devote to health consciousness as their careers advance and their priorities change. Even for the healthiest of young turks, genetics has a way of disrupting the best laid plans. 70% of young adults will be afflicted at some point with typical age-related maladies such as hypertension, high cholesterol, weight gain, the onset of diabetes, and other common diseases. For many of them, their family health history will catch up with them.

When any of these factors are added to the mix, the cost of life insurance increases, sometimes dramatically. The cost of waiting to buy life insurance increases with age, but it can accelerate significantly when health issues become a factor. For some, the biggest cost is the inability to even obtain life insurance should their health become a serious issue. For a young, healthy adult, the best possible time to buy life insurance is the present, when it is the cheapest, and while they can still get it.,

Employer Life Insurance is only Temporary

Many young adults will pull the trigger and elect the life insurance option under their employee benefits plan. The election is typically some multiple of their income, which for many, doesn’t result in a significant amount of life insurance coverage. Still, they feel as though they have fulfilled their obligation to be responsible, so they won’t need to give any more thought to life insurance, or the realities of job security.

In today’s economy, there is no job security, and any employer-based life insurance coverage is temporary for the 50 to 60% of young adults who will be changing jobs or their employment status over the next twelve months. And, when it happens, their life insurance coverage will not be going with them. For those who land with another employer, there is a chance that their benefits package won’t include life insurance.

Young adults would be better advised to forgo their employer’s life insurance option, and instead, establish their own coverage for the purpose of protecting their insurability.

Do You have a Debt Wish?

The average adult has over $10,000 in debt obligations. For many young adults, that doesn’t include student loan obligations, nor does include a mortgage. The same sense of responsibility that makes people pay their obligations when they are alive should provide the same motivation to ensure that they can be paid after they die. In death, as in life, there are obligations and expenses that have to be paid. Final expenses alone can amount to thousands of dollars, especially it medical costs were incurred. For this reason alone, every functioning adult should own life insurance.

You’re going to buy it Anyway

Eventually the one-third of adults that don’t own life insurance will become part of the two-thirds who do, and they will buy it for the same reasons – for love, for duty to family, for all of the practical purposes. The problem many adults encounter is that, when they really do need to own life insurance, they may have trouble getting it. As discussed in the “Health is Fickle” segment above, adults can slow down the onset of age-related maladies; however, they can’t always stop them. And, if there is any family history of heart disease, hypertension, high cholesterol, cancer, or other genetic propensity for disease, it will catch up to many adults at some point. Plus, it is important to note that life insurers do consider family health history in their underwriting. Adults with a negative family health history stand a much better chance of getting a favorable rate if they apply for insurance when they are still young and healthy.

Whole Life Insurance for the Recent Graduate

When one thinks of a college graduation gift the things that come to mind is a new car, an overseas trip, a cash bonus, or maybe a new set of clothes for the job interview circuit. Whole life insurance doesn’t usually make it on most people’s list, however, it could just be the best gift college grads could receive. Why? Well, first off, it is probably safe to say that it is something they wouldn’t buy for themselves. But, more importantly, it is the type of gift that embodies the significance of the transition they are about to make into a life of responsibility and purpose. And, though they may not fully realize at the time, in just ten or fifteen years, when they recognize the importance of life insurance as a foundation in their financial lives, they will be forever grateful its beginnings were formed when they were very young and very healthy.

There are those who might question the wisdom of purchasing life insurance for children, though most planners would agree that families should have some financial protection in the event of the unthinkable. For that purpose, a small policy to cover final expenses usually suffices. In most cases, these policies are transferred to the child when they are old enough to continue making the small premium payments on their own. At issue is whether you should, instead, buy a larger policy with the intent of gifting it to your child when he or she is ready to accept responsibility for it.

How Your College Grad Benefits from a Whole Life Insurance Plan

• It will provide them with permanent lifetime coverage for an extremely low premium.
• The premium is locked in for life at the lowest possible rate based on their young age and excellent health.
• They will begin to learn, early on, the role that responsibility plays in real life.
• It will convey upon them the importance of structured, long term savings.

Why Whole Life?

You have several choices for the type of life insurance plan that would be suitable for a young person. Term life is, of course, the least expensive, however, it offers only a death benefit and no other incentive to maintain the plan. Universal life would be a good choice but it does entail some interest rate risk that could require an increase in the amount of premium and could be subject to lapse if the cash value didn’t grow fast enough.
A whole life plan presents a young person with the best opportunity to lock in low premium rates with no threat of early lapse, and it guarantees an annual increase in the cash value. Some life insurers offer child whole life plans with a feature that increases the death benefit automatically when the child turns 21 at no additional cost.

Tips for Buying a Whole Life Policy for Your Grad

Buy it before they attend college.

We’re not talking about a significant difference in premiums if you buy it early, but it will give the cash values the opportunity to build. When they are presented with a whole life policy with accumulating cash values they can more easily recognize its significance as a savings vehicle.

Buy as much life insurance as you deem reasonable, but buy enough to make it a solid foundation plan for them.

These days $100,000 would be considered a starter benefit. $250,000 would provide solid protection as they begin their own families.

Buy from a highly rated life insurer.

Life insurance is considered to be among the safest of financial instruments, but it is always advisable to own policies issued by companies that are projected to be financially strong well into the future.

Buy from companies with a solid history of increasing dividends.

Dividends are the portion of the life insurer’s profits that are paid to policyholders, and, at some point can be substantial enough to pay all or a portion of the premium.

Choose the paid-up insurance dividend option.

By applying the dividends to purchase paid up additions it enables the cash value and the death benefit to increase faster providing more value and protection as your grad grows older. Purchasing paid up additions is much like buying additional blocks of fully paid for cash value life insurance that builds on top of the policy’s cash value and death benefit.

Summary

It may not seem like the most exciting college graduation gift, however, like annuities, a whole life plan is likely to be the most enduring. Ten, twenty or thirty years after all of the other gifts have been forgotten, their first life insurance plan will still be providing your children with meaningful value. In fact, it may very well be the source of funds that will provide your grandchildren with their opportunity to graduate from college.

Which Life Policy is Right for You

Making the decision to buy life insurance, while monumental in terms of its importance in your financial life, is nowhere as difficult as making the decision as to which life policy is right for you. For most people the decision to buy life insurance is a matter of course, it’s what responsible and loving people do. But few people are prepared for the process involved in selecting a life policy that is best suited for their needs.
The complexities of life insurance as a product are compounded by the sheer number of different types of products from which people must choose. The process can be greatly simplified when you have a thorough understanding of your own particular needs, concerns, priorities, and outlook on your future. With that, you should be able to quickly narrow your choices to find the right policy for you.

A Policy to Meet Your Need

When the need for life insurance is recognized the process for buying a policy should begin with an in depth discovery of what exactly you want your life insurance plan to do for you. That requires an honest assessment of your current financial needs (i.e. debt obligations, income replacement needs, family goals such as college education for the kids). Equally important, it requires a vision of the future for your family to determine the time horizon for your life insurance need.

Many people make the very costly mistake of assuming that the need for life insurance will suddenly disappear once their kids are fully grown. So, they will buy a 10 or 20 year term policy only to realize after it expires that their family still has the need for protection, even into retirement. It is more common than not for a family to reach that point and find that they haven’t accumulated enough savings; or that one of the spouses is not equipped to earn the kind of income on their own; or, perhaps, they have a special needs situation in which a family member continues to be dependent on current income. It becomes tragic, when that moment arrives only to find that you are no longer insurable, or that your insurance costs have become prohibitively expensive.

A Policy for Your Future

The life insurance decision is not just about protecting the here-and-now. It is about protecting your family’s future, and whatever it holds. And, because no one can predict the future, it makes little sense to predict when the need for life insurance might end. Like fixed annuities, Life insurance is as much about protecting your insurability as it is protecting your family.

When placed in this context, the choice of life insurance policies comes down to how you envision your future. If you envision an ongoing need for life insurance then your choices will come down to a permanent form of life insurance, such as whole life, universal life, or variable life. If, however, you are fairly certain that your need will diminish over time because you will have accumulated enough capital on your own, or your family won’t require much in the way of additional capital after your death, then you can get by with a term policy. With some term policies, you could have an option to renew the coverage in the future with the understanding that your cost of insurance will have increased significantly.

If your choice comes down to a permanent form of life insurance, your decision should be based on your budget, your tolerance for risk, and your outlook on future financial and economic conditions.

You Should Consider Whole Life if….

You are adverse to risk, or you prefer to have some predictability and stability for your life insurance plan. Whole life provides a level death benefit that is guaranteed as long as the premiums are paid. A portion of the premiums, which are fixed and guaranteed, are applied to the cost of insurance and the balance is left to accumulate, tax deferred, in a cash value account. Over time, your cash value build up, which is also guaranteed, can be sufficient to offset the premium payment so that your out-of-pocket expense is substantially reduced or eliminated. From that point on, your whole life insurance policy is guaranteed to last as long as you do.

You Should Consider Universal Life if….

You recognize that your need for life insurance may continue well into the future, but you want to keep your initial costs of a permanent policy as low as possible. The death benefit is level but the premium payments may be adjusted depending on the growth of the cash values. The cash values are credited with a current interest rate which can fluctuate. If the growth of the cash value is not sufficient to support the death benefit, you may be required to increase your premium payments. Because, universal life policies don’t have all of the guarantees of a whole life policy, the premiums are substantially lower.

You Should Consider Variable Life if….

You understand investments and like the idea that your cash value growth can be tied to the performance of the stock and bond markets. The faster your cash value grows, the sooner your policy may be able to pay for itself. Conversely, with the potential for higher returns comes the potential for greater risk in that your cash values can also decreased when the market declines. The death benefit is guaranteed, however, so there is no risk to your beneficiaries.

You Should Consider Term Life if….

You are convinced that you will be able to sustain the protection of your family’s financial security using your own resources at some point in the future. For many people, their choice is limited based on budgetary concerns. Term life is the cheapest form of life insurance and is affordable for anyone who has a need. The important thing is to have the protection. When the budget allows, you could also consider a “blend” of policies that combines a term policy with a permanent policy. You could buy two separate policies, or a permanent policy with a low death benefit that includes a term rider. With some whole life plans, you can use your dividends to purchase additional paid up insurance that will gradually increase your permanent coverage over time.

How to Reduce Life Insurance Costs

With rates as low and competitive as they have ever been, it’s as close to a “buyers” market in life insurance as we’ll get. Still, in these cash-strapped times, curbing all costs and expenses is a priority for most people, and buying life insurance is no different. While the cost of life insurance is predicated upon several factors over which we have little control, such as age, gender, and health, there are many ways in which the overall cost can be reduced. It helps to have an understanding of how life insurers base their rates and the extent to which some of the factors can be influenced when applying for a policy.

Health Factors

Your health condition and history, including your family’s history is the biggest factor used to determine your rate. Life insurers have actuarially determined which health conditions present the greatest risk and will apply premium ratings or simply decline coverage accordingly. But even if you have some conditions you shouldn’t be discouraged, as each company uses different standards in assessing risk and applying ratings which is why it is important to look at several companies when applying for coverage.

Many health factors can be controlled or modified to the extent that it will earn a more favorable rating. The obvious one is smoking which can increase your insurance cost by as much as 50%. Most insurers want you to be smoke free for at least 3 years before they will issue a favorable rating. Weight is another big factor. Sometimes it could be just a matter of a couple of pounds that could push you into a higher rating class.

Many companies provide some underwriting guidelines on their websites so you can see into which ratings class your height and weight fits. Hypertension and cholesterol levels are determinants that you may also be able to influence by changing your diet or kicking up your exercise before applying.

By working on these measures prior to taking a medical exam for life insurance you could greatly influence the rating that is applied by the insurer. Additionally, your could take some steps right before your exam to improve your rating, such as fasting for a day which could help to lower your cholesterol. Or, avoid alcohol, fatty foods, caffeine and sodium intake 24 hours before the exam. Also, it’s not a good idea to exercise to soon before an exam. Most importantly, get a good night’s sleep.

Lifestyle Factors

Life insurers also consider the way you live and how hard you live in their assessment. In addition to asking a lot of questions about your activities, hobbies and occupation, they will check your background including your credit and your driving record. Any indication that your lifestyle introduces additional risks to your health will generate a higher rating. If you have a lot of violations or accidents on your driving record you will pay a higher premium, so you may want to wait until some of them fall off your record. Lifestyle or hobby choices such as dangerous sports, driving motorcycles, or raising poisonous pythons may lead to increased insurance costs.

How Much Life Insurance You Buy

One of the easiest ways to control your life insurance costs is to make sure you buy just what you need. Some people buy life insurance based on some general rule such as 10 times income. That’s not advisable because it is likely to lead to either insufficient coverage or excessive coverage. The only way to know exactly what you need is to do a thorough assessment of your family’s needs, calculating the cost to replace income, pay off debt, and pay for future obligations.

Also, it is important to note that insurance premiums are often discounted at different coverage thresholds. For instance, a $1 million policy may cost less than a $850,000 policy due to a premium break at the million dollar threshold. You can find premium breaks at $250,000 and $500,000 thresholds with some insurers.

How You Pay for Life Insurance

Many people pay for their life insurance policy through monthly payments or automatic drafts from their bank account. While this is certainly a convenient and cash flow friendly way to pay, most insurers charge a fee for this privilege. You can lower your annual life insurance cost by as much as 10% by paying in one annual installment.

Buy Term

Term life is the least expensive form of life insurance, and it is easy to compare rates based on the amount of coverage you need and the length of the term. The shorter the term of the coverage, the less you will pay. There is one, very important caveat. While term can lower your costs today, it can become very expensive later on if you find that you still have a need for life insurance after the term policy expires. If that is case, your term costs will be much higher, and, if you developed medical condition, you could find your rates to be prohibitively expensive.

A more prudent approach would be to buy a blend of permanent and term insurance as a way to protect your insurability into the future and to keep your overall cost of insurance low. The total cost of ownership for some permanent plans such as universal or whole life can actually be lower than term in the long run.

Shop and Compare

Life insurance rates have come down sharply in the last decade, and competition among life insurance carriers has grown fierce, especially with the ability to shop and compare online. It’s easy to compare premiums between dozens of carriers. But, premium is only one, and perhaps the least important point of comparison. Just because one company’s premium is lower than another based on your age and general health, the underwriting standards can vary widely between companies. So, one company can offer a better standard premium rate, but it may be more difficult to qualify for it based on their underwriting guidelines. Some companies may promote an extremely competitive “super preferred” premium rate, yet less than 1% of applicants can qualify.

Companies view such things as height-weight ratios, hypertension, cholesterol and other maladies differently. It could be a very arduous process to search, review, and understand how each company addresses these underwriting issues. Your best course of action might be to work with a trusted insurance professional who has access to a wide range of different carriers. They will know which carriers would be the best to work with based on your particular needs or health condition.

Life Insurance Company Ratings Explained

Life insurance and annuities have always been considered to be among the safest of all financial instruments. Even as banks were being shuttered during the Great Depression resulting in people losing their life’s savings, life insurers emerged as the bed rock of financial security. Their preeminence as stable and safe financial institutions continues to this day thanks, in part, to the vigilance of the independent ratings firms that keeps the pressure on all life insurers to perform at their financial best. The ratings that these companies assign to life insurance companies provide the public with the insight it needs to be able to determine their relative strength.

A Host of Rating Firms to Keep Watch

All financial institutions are thoroughly analyzed and evaluated by several rating firms, including Standard and Poor’s and Moody’s. The life insurance industry has the eyes of one additional rating firm on it dedicated exclusively to rating and ranking life insurance companies for their financial strength, and that is A.M. Best which has been doing its work for over one hundred years.

Each ratings firm applies its own distinct methodology and criteria for evaluating life insurers, so their rankings may not correlate with one another. But all strive to achieve the same purpose and that is to conduct as thorough an analysis as possible of the balance sheets, income statements, general accounts, and business prospects of each insurer to provide a clear picture of their current financial condition as well as their ability to deliver on their obligations in the future. The product of their process is a complete financial analysis of each company and an assigned rating of their relative strength within the ratings category.

Because of their differing methodology and criteria, the analysis and ratings of each rating company should be considered independently of one another. However, you will find that their ratings and their rankings are similar, so a life insurer that rates highly with one ratings firm will probably rate equally as well with another. There are a few instances where the ratings and rankings my diverge somewhat, but not by very much.

Generally, the higher the rating assigned to a life insurer, the higher the probability that the insurer will be able to meet its obligations even in poor economic conditions. Companies assigned lower ratings are suspected of having some issues related to their balance sheet or business prospects which raises questions as to their ability to withstand poor economic conditions. Again, the criteria differs from one ratings firm to another.

The Meaning Behind the Ratings

Here is an overview of how the firms apply the ratings and the meaning behind them. The definitions are supplied by the ratings firms. Only the higher ratings are presented here. The lower ratings supplied by each of the rating firms imply that the life insurer would be vulnerable in deteriorating economic conditions:

A.M. Best

A++ and A+ (Superior):The company has demonstrated superior overall performance and has a very strong ability to meet its obligations to policyholders over a long period of time.
A and A- (Excellent):The company has demonstrated excellent overall performance and has a strong ability to meet its obligations to policyholders over a long period of time.

B++ and B+ (Very Good): The company has demonstrated very good overall performance and has a good ability to meet its obligations to policyholders over a long period of time.
B and B- (Adequate): The company has an adequate overall performance and can meet its obligations to policyholders, but may be vulnerable to unfavorable changes in underwriting or economic conditions.
C++ and C+ (Fair): The company has demonstrated fair overall performance and can meet its current obligations to policyholders, but is vulnerable to unfavorable changes in underwriting or economic conditions.

Standard and Poor’s

AAA: Superior financial security on an absolute and relative basis. Capacity to meet policyholder obligations is overwhelming under a variety of economic and underwriting conditions.
AA: Excellent financial security. Capacity to meet policyholder obligations is strong under a variety of economic and underwriting conditions.
A: Good financial security, but capacity to meet policyholder obligations is somewhat susceptible to adverse economic and underwriting conditions. BBB Adequate financial security, but capacity to meet policyholder obligations is susceptible to adverse economic and underwriting conditions.

BB: Financial security may be adequate, but capacity to meet policyholder obligations, particularly with respect to long-term or “long-tail” policies, is vulnerable to adverse economic and underwriting conditions.

B: Vulnerable financial security. Currently able to meet policyholder obligations, but capacity to meet policyholder obligations is particularly vulnerable to adverse economic and underwriting conditions.
CCC: Extremely vulnerable financial security. Continued capacity to meet policyholder obligations is highly questionable unless favorable economic and underwriting conditions prevail.
The ratings from “AA” to “B” may be modified by the addition of a plus or minus sign to show relative standing within the major rating categories.

Moody’s

Aaa: Exceptional financial security. While the financial strength of these companies is likely to change, such changes as can be visualized are most unlikely to impair their fundamentally strong position.
Aa: Excellent financial security, together with the Aaa group, they constitute what are generally known as high-grade companies. They are rated lower than Aaa companies because long-term risks appear somewhat larger.

A: Good financial security. However, elements may be present which suggest a susceptibility to impairment sometime in their future.
Baa: Adequate financial security. However, certain protective elements may be lacking or may be characteristically unreliable over any great length of time.
Ba: Questionable financial security. Often the ability of these companies to meet policyholder obligations may be very moderate and thereby not well safeguarded in the future.

Summary

Each of the rating firms issues a caution that their ratings and analysis are not a warranty of the life insurer’s financial strength. But, it would seem reasonable that, if a life insurer has been assigned the highest ratings of each ratings firm, it is the strongest possible indication of its financial strength. From a consumer perspective, since the promises and obligations are only as solid as the companies that back them, those the highest rankings from all three ratings firms should warrant initial, if not primary consideration.