Ideas, tips and news about life insurance and the uses of life insurance

I was inspired by a segment of 60 Minutes I watched this past Sunday.  The story was about the people in Wilmington, Ohio, who are in the grip of a brutal series of layoffs at DHL, the shipping company.  Before the layoffs, one of three households in Wilmington had a family member working at DHL.  As expected, the layoffs have left this town decimated.

I was particularly touched by the strong sense of community these folks displayed, reaching out to help the less fortunate until they no longer had the resources to help.  When some helpers stumbled, others reached out to those in the most dire need of help.  Once again, my cynicism of the increasing materialism of Christmas was allayed by a story of goodwill and hope.

One of the stories revolved around a mother who was laid off after her husband had passed away, leaving her with a young child to support on her own.  What made her plight even more difficult was the fact that her deceased husband hadn’t owned a life insurance policy, leaving the family with meager resources.  Working several part time jobs, she was barely able to keep her family afloat.

Based on her experience, life insurance was so important to her that she did everything she could to hold onto the policy she purchased after her husband passed away.  She even dropped her health insurance so she could continue making her life insurance payments.  Making sure her daughter wouldn’t have to suffer financially if she was no longer around to support her, she made the decision that her health would have to suffer rather than not providing for her daughter in the event of her death.  While I wouldn’t recommend her to drop her health insurance, I can’t argue her act of selfless giving.

Some states require this guide to be included with the application for life insurance.  It has so much valuable information in it for consumers that I will be selecting excerpts from it for this and future postings.  Today, I will include the section “How Much do you Need?”

Here are some questions to ask yourself:

1.  How much of the family income do I provide?  If I were to die early, how would my survivors, especially my children, get by?  Does anyone else depend on me financially, such as a parent, grandparent, brother or sister?

2.  Do I have children for whom I’d like to set aside money to finish their education in the event of my death?

3.  How will my family pay final expenses and repay debts after my death?

4.  Do I have family members or organizations to whom I would like to leave money?

5.  Will there be estate taxes to pay after my death?

6.  How will inflation affect future needs?

As you figure out what you have to meet these needs, count the life insurance you have now, including any group insurance where you work or veteran’s insurance.  Don’t forget Social Security and pension plan survivor’s benefits.  Add other assets you have:  savings, investments, real estate and personal property.  Which assets would your family sell or cash in to pay expenses after your death?

You know you need term life insurance but you can’t decide on the death benefit amount or the length of term because you see the needs changing over time. You might be a good candidate for layering or laddering several term policies.

As an example, we have a 45 year old married male with two children, ages 5 and 10. He has 10 years left to pay off his mortgage. Looking at his needs, we see his insurance needs as the following:

• Ages 45-55 – $2 million to replace his income, cover the mortgage, college costs and final expenses.
• Ages 55-65 – $1 million to replace income, cover college costs and final expenses.
• Ages 65-75 – $500,000 to replace income (or pension) and final expenses.

Typically, he might look at these options;

• He could purchase a $2 million permanent policy but the premiums are cost prohibitive;
• He could purchase a $2 million 30 year term policy, but the premium might still be more than he wants to spend;
• He could purchase a $2 million 10 year term policy and plan to purchase an additional policy in 10 years but he might not be insurable at that time or;
• He could purchase a $500,000 30 year term policy but that would leave him under insured for the first 20 years.

Here’s where layering can come in handy. I would recommend:

• A $1 million 10 year term policy and;
• A $500,000 20 year term policy and;
• A $500,000 30 year term policy.

This would give him $2 million for the first 10 years, $1 million for the next 10 years and $500,000 for the next 10 years.

As you can see above, this would provide the right amount of coverage at the lowest possible premium. We don’t recommend this for everybody, but in the right situation, it saves the client money while giving him adequate coverage.

We hear all sorts of real-life stories concerning how people have been affected by having or not having life insurance. In the following story, Ryan and Megan are fictional characters made up of a composite of several of these stories. We are launching a campaign in which Ryan and Megan will be representing many of these stories we have heard.

Megan and Ryan Collins, both in their early 40s, were living what they thought was an idyllic life. As recently as 2006, the American Dream they had long sought had become a reality. The mortgage brokerage company Ryan built over the past ten years provided his family with the lifestyle he always wished for. Their home, which they purchased when Ryan started his company, was worth well over double the $500,000 they paid for it 10 years previously. When Ryan expanded his business to several additional offices, they used some of the equity in their house to finance the expansion. Their three young children were going to the finest private school in the San Fernando Valley, a sprawling suburb of Los Angeles.

Following the advice their financial planner gave them many years ago, Ryan regularly invested in mutual funds in his 401K. His account was approaching $300,000 and if he continued his usual contributions to the plan, they were well on the way to being able to have a very comfortable retirement. As their assets were growing continually, they didn’t see the need to purchase life insurance to supplement the $250,000 policy they had purchased for Ryan when they bought the house. If something should happen to Ryan, they reasoned, they’d have enough assets to get Megan and the children on their feet again.

And then, the economic downturn began. The dream house was now worth about what they had paid for it. However, because they had taken the equity out of the house to finance Ryan’s business expansion, they were now upside down on their mortgage. The funds in Ryan’s 401K were now also worth approximately 50% of their peak value. Due to the crashing real estate market, Ryan’s business suffered huge losses and he was forced to close. He was doing some refinancing so, along with some money he withdrew from his 401K, they would weather the storm. And, weathering it they were, until Ryan’s heart stopped working.

Thankfully, Megan was able to sell the house on a short sale. She and the children rented a modest house in another community. The children had to enroll in public school, as they could no longer afford the private school tuition (in addition to moving away from the area). They would have to live on the proceeds from the life insurance e policy until Megan found a job . She soon learned how difficult it would be in this job market, especially since she had been a stay-at-home mom for last fifteen years.

Megan was now facing the cold reality that Ryan had not evaluated his life insurance needs as his situation changed.  Instead of increasing the coverage to protect the growing assets, he made the assumption that, if needed, Megan, could liquidate enough assets to keep the family living comfortably. He didn’t foresee the economic meltdown that was now affecting the whole planet, nor did he reconsider his life insurance needs after the assets were nearly gone. If he had increased his coverage after suffering huge economic losses, the family would probably still be in the same house and the children in the same school.

Don’t let their story become yours. Review your life insurance policies annually and make adjustments to your coverage as needed so your family will be fully protected.

Do you have a similar story you would like to share?  Send it to stories@lifeinsure.com so we can share it with our readers. Anonymity is guaranteed, as your stories will be told through the eyes of Ryan and Megan.

If you are like most Americans, your net worth has probably taken a big hit in the last eighteen months. With some stock portfolios down 50% and home prices falling faster than the Federal Government can produce new schemes to bail us out, it doesn’t take a math whiz to see that your nest egg isn’t what it once was.

Why am I rehashing this bad news in a blog about life insurance? It’s simple – many folks, when evaluating how much life insurance is needed to adequately protect the family in the event of the breadwinner’s death, consider that liquidating some of the accumulated assets would provide some funds for the family. These assets, along with some life insurance, would be enough for the family to live on for some time.

Maybe, in light of these shrinking assets, one should reconsider how much life insurance would be needed to keep the family comfortable in the event of the breadwinner’s death. I have spoken to many clients recently who have taken a look at their assets and realized they had better add more life insurance to their financial plans.

When this financial mess improves and your stock portfolio and real estate do so too, you can reevaluate whether to reduce the amount of your life insurance or to keep it in place to protect your assets, so the family wouldn’t have to liquidate them to survive.

How often do you disregard your doctor’s advice? Go for this test, get this prescription filled, you should have that looked at, etc. I have to admit that there are several times I have ignored my physician’s advice, rightly or wrongly. So far the dice have rolled in my favor and I haven’t suffered any consequences.

If your physician recommends tests or treatments and you don’t follow the doctor’s orders, you may escape future medical problems, but you may pay the price if you apply for life insurance. We have seen it often in our office where an insurance company declines coverage for an applicant because a prescribed test/treatment wasn’t followed up on (it will show in the physician’s records). Just today a client was declined because his physician suggested he should get an EKG, but the client never received the treatment. The insurance company refused to offer coverage until the test was complete.

The moral of the story is, if your physician has suggested treatment for you, follow through with it before you apply for life insurance.

According to the Life and Health Insurance Foundation for Education (LIFE), life insurance should be considered at every stage of life – single, young family, established family and pre-retiree/retiree. Here is what they recommend for each stage of life:

• Single people – the rule of thumb here is, if there are those who depend on you financially, such as aging parents you might help support, life insurance would certainly be appropriate protection for that financial assistance in the event of your death. Another good reason for life insurance would be if you had substantial debt you didn’t want to burden your family members with in the event of your death.
• Young families – if you, as the breadwinner, were to die, would your assets be enough for your family to maintain the style of living they have become accustomed to? If the answer is no, life insurance proceeds should be enough to allow your family to continue the lifestyle you have provided them with. It can also help with longer term needs, such as college education for the children and retirement funds for the surviving spouse.
• Established families – my clients often tell me they won’t need life insurance after the children are grown and out of the house and assets have grown to the point where they can be self-insured. While many find out that accumulating enough assets to be self-insured is a much larger task than they had expected, even with an accumulation large enough, they find the needs for life insurance shift from the purpose of income protection to that of asset protection. Most realize that it would be difficult for their heirs to liquidate the assets comfortably and, therefore choose to keep life insurance for that purpose.
• Pre-retirees/retirees – at this stage, there are many reasons to have life insurance. If you are fortunate enough to have accumulated a large estate, life insurance can be used as a vehicle to ensure a smooth transition of assets to the next generation, without burdening them with estate taxes. If you don’t have a need for this type of protection, perhaps you can use life insurance to pay off your mortgage or bills or to cover final expenses.

At each stage, you should work with a financial professional who can help you select the right product to ensure the proper protection for your family.

Most people buy life insurance because they care deeply about another person or people and they want to make sure the loved ones left behind are taken care of financially. When you die, there will be an emotional loss felt by loved ones. An economic loss on top of the emotional loss is an unbearable combination and one that families should not have to experience.

When you purchase life insurance, you are preventing the financial loss others would occur upon your death. I’m not claiming that the following story is the reason I have chosen life insurance sales as an occupation, but it is a perfect anecdote for this topic.

When I was thirteen years old, my father passed away from a sudden heart attack. He was survived by myself, my two brothers (ages 8 and 16) and my mother. Naturally, the emotional loss was devastating to us as a family. The emotional loss was compounded by the financial loss caused by an inadequate life insurance policy. My father, who loved us dearly, only had a policy that barely paid the funeral expenses.

My mother, who had been a stay-at-home mom for sixteen years, now had to somehow support three young sons. To say life was difficult would be a gross understatement. If my father had purchased a sufficient amount of life insurance, the emotional loss would have been the same but we would have been able to properly mourn the loss of a loved one without having to deal with the prospect of financial ruin.

I hope this story inspires you to purchase an adequate amount of life insurance to protect your family from potential financial loss.