Life Insurance: Money When It’s Needed Most

By Steve Davis, CFP®

Life Insurance: Money When It's Needed Most

In 1990, when my wife was pregnant with our first child, I lost my job in a huge layoff at the bank where I worked. All the banks at the time were struggling and nobody was hiring. The only job I could find was selling life insurance. One of my former coworkers purchased one of the first policies I ever sold; I think he felt sorry for me.

Two years later, this same friend of mine died unexpectedly while playing basketball in his adult pick-up league. It was a shock to lose a friend at such a young age, but the experience of delivering a substantial death benefit check to his widow helped me truly believe in what I do. You see, this insurance money allowed a mom to leave her 9-5 job so she could stay at home when her young kids needed her most. Recently, these same children graduated from college without student loans. Their education will forever be a lasting legacy to their dad, thanks in part to the proceeds from that life insurance policy purchased so long ago.

Three Ways to Cut Costs on Your Life Insurance
The job market over the past few years has been even worse than when I lost my job in the early 1990s. Paying insurance premiums during times like this can be challenging, but this is often the time when it’s most important to own your own life insurance. During the recent round of layoffs, many people who had coverage only through work lost their only insurance when they lost their jobs. According to a recent study by the financial research firm LIMRA, life insurance ownership is at a 50-year low with less than 45 percent of US families having individual coverage.

Life insurance is sometimes used to fund estate taxes or business obligations, but we won’t be focusing on that in this article (that’s a subject for another day). The majority of time it’s purchased to take care of your family once you’re gone. Here are three ways to make life insurance more affordable.

1. Figure out how much coverage you really need.

Remember that life insurance has one purpose: to meet your financial responsibilities if you die. If no one depends on you financially, you likely don’t need it and shouldn’t pay for it. Life insurance is not an investment. Instead, it’s used to take care of your family once you’re gone. Insurance death benefits provide income to replace the salary you used to earn and can also be used to pay one-time expenses like your funeral or your children’s college education costs.

Sometimes, people own more coverage than they actually need. For example, you may not want to pay off your mortgage if you have an especially low interest rate or you need the mortgage interest tax deduction on your tax returns. There are some basic rules-of-thumb for determining how much coverage you need, but these are sometimes way off base. A better way is to figure out your specific needs by using an online calculator like this one: http://www.talkwithdavis.com/Life-Insurance.c123.htm

2. Shop for lower rates.

Rates have come down dramatically since I sold my first policy in 1990. You can evaluate rates online or with the help of an advisor. Working with an unbiased insurance advisor, preferably one who represents a large number of life insurance companies is often the best way to review your term insurance. While online vendors give you the ability to compare quotes, an advisor can often help you navigate the underwriting process. This is especially important if you have any medical issues that might disqualify you from low “preferred” rates – and not all companies have the same underwriting requirements. Additionally, a company that offers the best “preferred” rates may not be cost competitive when comparing “standard” rates.

3. Cut costs with term insurance.

Life insurance comes in two basic flavors: term and permanent. Term policies usually have a lower fixed cost and provide coverage for a specified period of time, often a term of 10 – 30 years (such as until your children graduate college). Permanent insurance, like whole life is designed to build equity (cash value) and will last your entire life as long as you continue to pay premiums. In the early years, the annual cost for permanent insurance tends to be substantially more than the premiums for term insurance. Some people prefer the idea of buying permanent insurance and building equity, but this is a huge mistake if it means you end up with a lot less coverage than you need. For the same cost, term insurance provides significantly more death benefit for your beneficiaries. Term insurance is usually the only type that most families need.


The Reason for Life Insurance
My friend really didn't buy his insurance because he felt sorry for me. He did it because he loved his family. Almost twenty years after his death, his children continue to benefit from their dad’s decision so long ago.

The cost and availability of life insurance depend on factors such as age, health, and family medical history.  If replacing your insurance, never cancel a policy before your new coverage is in place.  Policies commonly have surrender charges and replacement may carry income tax implications. Any guarantees are contingent on the claims-paying ability of the issuing insurance company.  If you are considering the purchase of life insurance, consult a professional to explore your options.

This article was written by Steve Davis and appeared in the column "Talking with Davis about Money Matters" found at http://mansfield-ma.patch.com/articles/life-insurance-money-when-its-needed-most