Dear Diary – 02/14/16: LIFE INSURANCE – Do I really need it? If so what kind? How much? What company?

Life Insurance Pics_2b

Single, no dependents, what do I need it for? I already have coverage through the company I work for, why do I need more?  I am a small business owner just starting to build my real estate portfolio,  perhaps what I currently have through work is not enough, or is it?  What kind of debts (personal and business) do I currently have and do I have enough savings to take care of that should something happen to me or will it fall back on my family?  Why not then just establish a low-risk savings fund to cover funeral costs and invest the money I would have paid for insurance premiums?  I could also obtain coverage that will pay the estate taxes on a huge estate so heirs don’t have to liquidate assets at unfavorable prices to pay them.

WHY DO PEOPLE BUY LIFE INSURANCE ANYWAY?

  • A young single adult who’s not married or not in a relationship: to pay their end-of-life expenses so their parents don’t have to come in and clean up the debts.
  • A home owner: to pay off the outstanding mortgage should something happen to them (Mortgage Life Insurance).
  • A young single policyholder who offers financial or caregiving support to parents: to cover the need to care for their parents.
  • Older consumers: to leave a legacy for their children or support a surviving spouse.

Buying a policy while one is young and healthy also means lower premiums so perhaps it is not such a bad idea after all. Ok, so let’s entertain the idea for just a minute.  While my untimely death may certainly affect a lot of people, it won’t put them in a financial bind in most cases since I am single with no direct dependents.  It would however be wise to consider purchasing a small, inexpensive policy that would cover my funeral and burial costs.   If I were to buy life insurance (supplemental as I already have some with the company that I work with), it would not be so much a way to replace my income, but rather a way to cover final expenses (medical, funeral/burial) and pay off debts (personal and business).  Additionally it would help pay off estate taxes and ensure business succession.

Due to significant household expenses (mortgage), mortgage insurance would be an option, however, what I really need is, cash to cover all of my living expenses. Term life insurance will give me the cash to spend as I see fit (or better yet, as my beneficiaries see fit as I will be long gone).

FINAL EXPENSES

Medical, funeral/burial expenses can get significantly expensive for any family. A life insurance policy can help keep my family’s income intact upon my death and ensure that these expenses are fully paid for without them having to deplete their own income.

PAYING OFF DEBT AND BUSINESS SUCCESSION:

As a young and ambitious real estate investor with a passion for real estate, it is imperative that I make plans that allow for payment of estate obligations as well as allow for business succession upon my death. Mortgage payments, credit cards or other personal and business debts are just a few of the things that I have and will continue to incur in my life as a growing real estate investor.  My family has been very happy for me and very supportive of my dreams to grow as a newbie landlord and real estate investor.

With little current savings, it would make sense to seek a life insurance policy.

I would hate for my beneficiaries to be forced to sell some of my real estate (distress sale, gasp!) to raise money for estate obligations upon my death.

I would hate it too if in addition to estate obligations they are forced to have to sell some of their own investments in an effort to raise money to pay off my personal and business debts.

Instead it would feel much better knowing that when I die, there is money to take care of estate obligations, debts, as well as have money left over for them to use for themselves. It would be great to know that my real estate holdings do not have to be sold but can continue to be held and sold when the market is right/when the price is right and never as part of a distress sale.

I am young, living a very healthy and fit lifestyle, no ailments that would disqualify me from getting life insurance. I may be a prime candidate for life insurance and would get a better rate while still young, so why wait?  Expert Tip:  it may be wise to buy a policy sooner rather than later.

WHAT NOW?

So now that I am thinking more and more that it is not a bad idea to add life insurance into my financial planning, I have to figure out what next? What kind of policy do I buy?  How much do I buy?  What company do I go with? How do I know if it is the right policy?

I don’t want to buy the wrong policy (expensive) from the wrong company and find out later that I am underinsured, leaving my family to pay the price for my mistake when I am gone!

Research shows that purchasing the wrong policy is an occurrence commonly seen more among women and in particular, women with children, who are single and the primary breadwinners for their family. While a woman myself, I do not have any children and/or other dependents, but I would like to ensure that I get the right amount of coverage from the right company and to start I do now understand that not all insurance carriers offer the same policies, services, support or tools.

Buying a policy while one is young and healthy means lower premiums. However, whatever your age or life stage, the first step in purchasing life insurance is conducting a needs analysis. I did my best to come up with an estimate using a great life insurance calculator that I found.  I then went a little conservative by overestimating some of my current expenses in order to come up with the amount of life insurance coverage that I feel I need in order not to be a burden to my family upon my death. (see below)

Type of Expense Amount How to estimate
Mortgage/Rent $123 (enter your amount here and then multiply by 1.5) Do you have an outstanding loan or rent payments? If so, your coverage should help your survivors pay off the balance of your mortgage or continue with monthly rent or mortgage payments.
Debts/Loans $123 (enter your amount here and then multiply by 1.5) Most people have other outstanding debts, including credit card balances, car payments, and education loans. Your coverage should allow your family to pay off the balance of outstanding debts and loans in either one payment or monthly payments.
Household Bills $123 (enter your amount here and then multiply by 1.5) How much money will your family need to cover household bills, such as utilities and food? You should take at least 12 months’ worth of household bills into consideration when deciding how much coverage you need. I decided to opt for 1/3 of my current annual pay X 1.5
Children and Education Expenses $0 Do you have dependent children? Consider how much money will be needed to support them–including education expenses–until they can support themselves. I personally do not have any dependents so the amount is $0 for me.
Funeral Expenses $123 (enter your amount here and then multiply by 1.5) One of the most immediate expenses your family will face is the funeral. Typical funeral expenses range from $5,000 to $10,000, depending on personal preferences. I added a few extra $s to allow for shipping of body back to Kenya.
Income Taxes $123 (enter your amount here and then multiply by 1.5) Your family must pay federal and, where applicable, state income taxes for you for the year in which you die. As a guideline, you can estimate your taxes based on last year’s income tax returns. I based my # on 2014 Taxes + New amounts given recent acquisition or property.
Estate Taxes $123 (enter your amount here and then multiply by 1.5) Your family may need to pay estate taxes if your estate totals $1.5 million or more. You may want to consult with your tax advisor or financial planner to estimate what your estate might owe in taxes.   I decided to simply be conservative and opted for 1/3 the income tax for now x 1.5.
Emergency Fund $123 (enter your amount here and then multiply by 1.5) In general, your family should have savings equal to 3 to 6 months’ worth of expenses to cover unexpected emergencies.   I decided to opt for half my current annual pay x 1.5.
Other Obligations $123 (enter your amount here and then multiply by 1.5) You may want to consider how much your family will need to take care of other financial obligations.
Minus $0 What to subtract Subtract: Include any personal assets or savings (not including your home), your spouse’s income (consider how many years he or she will work until retirement), or any other sources of family income. Being single, there is no “spouse’s income” There is rental income; however I opted to be conservative and not consider that in my calculation.
Total Requirements $750,000 to $1,000,000 This is the Total Life Insurance that I Need.  Again, as mentioned I did go conservative and could probably do fine with $500,000.

Notes: Insurance needs are based on income replacement needs and personal preferences.  A popular approach to buying insurance is based on income replacement. In this approach, a formula of between 5 and 10 times your annual salary is often used to calculate how much coverage you need. Another approach is to purchase insurance based on your individual needs and preferences. I choose to be conservative and  opt for X1.5 the shown amount on any of the expense items.

Based on my evaluation clearly the life insurance obtained via my work would not be sufficient to cover all of the listed expenses and I would need substantially more. Additionally I am not presently sure of the contract terms of my current life insurance policy, so I may find out (or my family since I will be 6 feet under!) that based on the terms of the policy I do not even qualify, gasp!  I have therefore reached out to request a copy of my policy from my current employer, while also looking at supplemental life insurance outside of a work situation.  Research continues……:

TYPES OF LIFE INSURANCE: I learned of two general types of life insurance;  Term and Permanent with the comparisons shown below:

Evaluation Aspect Term1 Permanent2
Time Sets for a set amount of time – typically the duration of a mortgage or until children graduate from college (10, 15 or 20 years) Lifelong.
How it works You pay a fixed premium that covers you for a specific period, usually 10 or 20 years. Coverage continues for life. Permanent policies typically have an investment component as well as the insurance, and a “cash surrender value” if you cancel them
How Common Most common of the Two. Not the choice for most.
Price Typically much less expensive of the two. Approximately $49/month for a $500,000 Typically more expensive of the two. Approximately $190/month for a $5000,000 coverage.
Flexible Financial Features Not Many Has More
How Payments are Made If person dies during the set time of the coverage. Paid out to the specified person/people.
Cash Value None Has cash value and one can earn interest and borrow against it.
Borrowing against the policy N/A 4Can be done at a price.
Savings Accumulation None Can accumulate savings on a tax-deferred basis.
Coverage For as long as you are paying premiums.
How one can purchase Off the internet Need services of a licensed agent.
Disadvantage Premiums can go through the roof once term expires3
Premiums The annual premiums are fixed and are based on your health and life expectancy at the time you apply for the policy. The premiums can be fixed or not, depending on the policy you purchase. Premiums are based on your health and medical history.
Premiums and Face Value Little to no flexibility. Offers fixed premiums Universal Life policies: highly flexible in regard to premiums and face value. Premiums can be increased, decreased, or deferred within certain limits, and cash values can be withdrawn, although this will decrease the policy’s death benefit. You may also have the option to change face values. Universal life policies typically offer a guaranteed rate on cash value, which may vary, depending on the policy provisions. You’ll receive an annual statement that details cash value, total protection, cash value accumulation, and fees.

Variable Life insurance: offers fixed premiums and a variety of investment options. Your cash value is invested in your choice of stock, bond, or money market portfolios. Cash values and death benefits can rise and fall based on the performance of your investment choices.

Generally no guarantee on cash values. Fees for these policies may be higher than for universal life, and investment options can be volatile. On the plus side, any cash value accumulation accrues tax-deferred as long as the funds remain invested in the insurance contract.

 

Borrowing against the account N/A. However given that permanent life insurance is several times as expensive as term life insurance for the same amount of coverage, I could save by purchasing term insurance instead, and then amass my own nest egg so that I don’t need to borrow anything to pay for a large expense. Also, when one borrows against their permanent life insurance policy, they diminish the policy’s value and can defeat the purpose of even having life insurance. One can borrow against it.

Notes: 1Has 2 options; term life policy with a flat annual premium or semi-annual premium.  Variations include: Level Term and Declining Balance Term.  Level Term (keep the premiums constant for a set period of time). B. Declining Balance Term:  often used as mortgage insurance since it can be written to match the amortization of your mortgage principal.  Once the mortgage is paid off, the insurance is no longer needed and the policy expires. 2Also called Cash-Value .  Types of permanent Life Insurance include:  Whole Life, Variable Life and Universal Life.

3Can be handled by “laddering policies” buy another policy before the end of your term so that coverage continues. One can also opt for Level Term to keep the premiums constant for a set period of time.

4Withdrawals and loans against a policy’s cash value will reduce policy values and death benefits, increase the chance that the policy will lapse, and may trigger tax consequences.)

SO….. TERM OR LIFE (PERMANENT LIFE)?

Currently I lean more towards Term as I have no dependents and only need it to cover expenses upon my death. Some say I don’t need it given my situation, but if I am going to have anything, perhaps “term” over “Life” all while setting aside money for my own investment vs. getting it tired up in an expensive premium that may never pay off.

WHAT TO KEEP IN MIND IF YOU GO TERM OVER LIFE LIKE I AM CURRENTLY CONSIDERING:

  • Term insurance is basic, generally inexpensive coverage with premiums that increase over time and no cash value component.
  • Consider a term policy that is renewable (at any age) and convertible to whole life should your needs change without a medical exam. Research shows that, if you think your financial needs may change, you may also want to look into “convertible” term policies. These allow you to convert to permanent insurance without a medical examination in exchange for higher premiums.
  • Whole life provides level coverage with level premiums. A portion of those premiums goes into tax-deferred cash value accumulation.
  • Premiums on variable policies may be fixed, but face value and your cash value will fluctuate.

TERM NOT LIFE (For me at least) : I love the article by Neal Frankle.

http://finance.yahoo.com/news/4-life-insurance-policies-never-180314056.html

Whole life/universal life. Life insurance is a tool, not an investment. With whole life/universal life insurance, you will pay a higher premium with the promise that the company will take those extra dollars and invest them for you. The problem is that this type of insurance is very expensive. The investments don’t grow because the expenses eat up your interest.”

“In 29 years as a financial planner, I’ve yet to see whole life or universal life pay off for any client. Often, people have little to show for such policies other than the money they paid in. Whole life and universal life policies are the reasons why life insurance companies can afford big buildings and Super Bowl ads. The only time these policies make sense if you have an estate-tax problem but this is a subject beyond the scope of this post.”

“Life insurance is a very important tool. When you use it for its intended purpose, it’s great. That means you should look to term life to cover your family protection needs. Ignore the slick sales gimmicks of guaranteed life, life insurance or children, travel and accident insurance, and whole life/universal life.”

OTHER COMMENTS ABOUT TERM VS. LIFE:

“Yeah, I am agreeing with you Dan, in the end it always depends on the needs of each one of a policyholder. In some case whole life insurance is better, for another, term is suitable one, and there might be someone who does not need insurance at all. This where we need a financial advisor to help us know what is the available option and choose the best one of them.”   http://www.moneysense.ca/magazine-archive/life-insurance-is-term-life-always-enough/

SO HOW DO I FIND THE RIGHT COMPANY FOR ME?

  • Find a company that has a history of paying claims and has a strong financial rating. Company ratings like “Standard & Poor” can offer insights into an insurance company’s financial stability.
  • Get referrals to a reputable insurance agent by family and friends.
  • Avoid insurance products that are overly complicated or over-promise.

WHAT ARE THE ALTERNATIVES:

The only reason to consider mortgage protection insurance instead of term life insurance is if one can’t meet the underwriting criteria for the latter. One may be able to get mortgage protection insurance without passing a medical exam. However, it’s also possible to get small amounts of term life insurance without a medical exam, so if one is difficult to insure, a combination of both of these products might be right.
RECOMMENDED COMPANIES:

In searching for reputable companies, I found this great article, “Compare Reviews for Life Insurance Companies”  by Neal Frankle a certified financial planner in Los Angeles and Life Insurance Contributing Editor of WealthPilgrim.com an information resource for consumers.  http://www.consumeraffairs.com/insurance/life.html#guide-reviews

His article lists the best rated life insurance companies and allows one to sort based on “most reviewed, best rated and least reviewed and lowest rated” which is rather helpful to provide a quick review of companies . As part of my due diligence efforts, I am thinking of comparing what I find on this list with what I find from other sources such as Insure.com, friends and family referrals, Investment Community of the Rockies (ICOR) and Yelp.  Whenever I read reviews, I pay particular attention to the negative reviews first as it helps me do a quick narrowing down of companies.

Life Insurance Pics_2dTO DO: Start going through the list provided on Neal’s Page to determine 3 to 5 companies to reach out to and start the application process. To provide updates along the way.

THE LIFE INSURANCE PHYSICAL EXAM 

Better health start makes a big difference. So I learned that ratings are given as shown (see box below for a quick summary) and something as subtle as a slight elevation in blood pressure could cost me a 20% increase in quote!

 

Health Stat Approximate % of Population Rating Premiums
Healthiest 20% Preferred Plus 1
Next Healthiest 30% Preferred 2
Borderline Healthy 30% Standard Plus 3
Below Borderline Healthy 20% Standard 4

Note: 1 – lowest premiums 4 – Highest premiums The above table is a generalized summary.  There are other subgroups not shown, the above just shows a summary.

Reports show that depending on my age, each step up from standard will save me, on average, 20 percent on premiums.  The risk assessment determines my life insurance rates. The greater risk I pose, the higher my premiums, until the company decides it can’t cover me at all.

It is clear that a healthy, active lifestyle helps greatly not just limited to ensuring I get a good life insurance premium but for life in general. So I choose to make regular workout and eating healthy a lifestyle choice.

It is clear that if one is obese, uses tobacco, alcohol or does drugs then the chances of getting a “preferred plus” rating are slim to none. So outside of living a healthy, active lifestyle, how else do I prepare for my life insurance exam? Knowing what to expect is step #1.

Research shows that the total application time is 3 – 4 weeks with the process broken down as shown:

Step # Activity Approximate Duration
1 Application 20 – 25 minutes
2 Medical Exam 30 – 45 minutes
3 Phone Interview 20 – 25 minutes
4 Underwriting and Approval 2 – 4 weeks
5 BINGO! Policy goes into Effect!

 

  • Application: Approximately 2 pages with support documentation to include, latest tax return and proof of employment. I will be required to sign authorization forms for release of health information to the insurer. I will then submit the signed application and authorizations to my broker (or insurer directly) and will be contacted to schedule a paramedic exam and phone interview at my convenience. Research shows morning appointments are better for the medical exam as it will follow 12 hours of fasting so the sooner I can get done the better!
  • Medical Exam: The life insurance exam is typically performed by a paramedic and it can be done in my home or office (whichever is more convenient for me) at the insurance company’s expense. It takes about 30 – 45 minutes (longer if more needs to be done). The results of the exam will be made available to me or my doctor and will also be submitted to the underwriter. The underwriter will contact me or my doctor (with my permission) if he/she has additional questions following receipt of the physical exam results. Ex. if the tests or questionnaire turn up a medical condition that might affect my premium or benefit amount.
    • I will not pay anything for the exam and the results are generally good for 6 months and can be used when shopping around for another insurance company or a different type of insurance ex. long-term disability insurance.
    • Once the results are received, and I do not agree with the results either because I just had an off-day, I can contact my broker to see whether the insurer will accept a second exam. That being said, it is not a full “do-over” I should expect that they results from the first exam will still be considered.
    • New Medical Underwriting: Following purchase of a life insurance policy, I can request a new medical exam at a future renewal date (as early as the first policy anniversary) to see whether I qualify for a better rate. If the results are worse, I can decide to just keep my current policy, if they are better, I can ask the insurer to re-evaluate my risk by including the new results to see whether I qualify for a better rate.
  • Phone Interview: I will get a call from an insurer representative to ask about my lifestyle ex. travel & hobbies and health history. This part threw me off when I first started speaking with my financial advisor. She was doing this part and I guess the application as well. I prefer that these two roles be separated. The broker to me should not also be the insurer representative as there is tendency for a little biasness in such an arrangement. So in an ideal situation (for me), when the two are separated, then the broker would provide me with a list of questions before hand so that I know what to expect once I receive the call from the insurer representative. The broker will also advise to have the name, address and phone number of my primary care physician and any other doctors seen in the last five years. This was another one of those things that did not happen in my case so I was not prepared. I cannot stress enough how much it is important to prepare one for these type efforts as it will go a long way in determining whether I pass or fail my interview and/or medical exam.
  • Underwriting: Assuming everything is in good order with both my medical exam and my phone interview, my case will go to underwriting for final approval. Depending on my health status, the insurer may contact me to ask for more information or to request additional medical records, which can extend the underwriting time. When the policy is ready, my broker (or the insurer) will deliver it to me. I will have to sign a delivery receipt and authorize the payment method to activate the policy.
  • Policy goes into effect: Once my application is approved, the insurer will notify me and request payment. I may be given a binder, which is a certificate of proof that my policy is in effect while I wait for the official policy to arrive. It is advised to store the policy and a copy of the application with all other important documents for future reference. It is further advised to make sure beneficiaries know about the policy and have access to it. Review policy and beneficiaries every 12 to 18 months to ensure they’re up to date.

MORE ON WHAT TO EXPECT:

  • The insurance company is screening for signs of the “big three”: cancer, diabetes and cardiovascular disease. HIV, high cholesterol, liver or kidney disorders, diabetes, hepatitis and immune disorders are all tested for as well as drug use, and smoking. Regular/Normal blood pressure, good cholesterol and glucose levels and little to no trace of nicotine and a good BMI (basal metabolic Index: based on height and weight) are a good start for a physical exam. Because a lot of people are borderline between ratings, the longer I can go watching what I eat and ensure that I am exercising regularly, the better my chance of making my goal of securing a good rating with lower insurance premiums.
    • I should have and be ready to provide, a list of current and former doctors, including addresses and phone numbers.
    • I will be quizzed about the state of my health, current therapies, medications (prescription and over-the-counter) and vitamin supplements. I will also be quizzed about whether I smoke, drink, use drugs or engage in dangerous pastimes such a sky diving/caving – so far so good.
    • The nurse will take my blood pressure reading as well as get my height and weight, draw blood and take a urine sample. I may be required to undergo an EKG (very rarely done, but possible).
    • I have heard that it suggested to drink a lot of water starting a week before the appointment. This works to clean toxins from my system and also makes it easer to draw blood on the day of the appointment. God knows I am one of the unlucky few that has to be poked more than once just to draw blood and so needless to say, bloodwork is the least favorite of any paramedic exam.Staying hydrated especially on the day of the physical exam also ensures that I am able to rpvodie a urine sample if needed.
    • A 12 hour fast is required before the physical. Even a fruit will through off the glucose readings, so this is not new. Not fasting I risk having elevated blood sugar levels and blood pressure levels resulting in a false positive on my life insurance physical exam, something I do not want.
    • It is recommended to get a good night sleep (at least 8 hours – I usually find that 7 is enough for me, but I will take an extra hour of sleep any day). Good sleep helps one feel rested and helps avoid stress, something I do not need on the day of the physical exam.
    • It is also suggested that one avoid any strenuous exercise 24 hours before the physical exam. Exercise can raise blood pressure and pulse.

SOME GOOD EATING HABITS THAT WILL HELP BOTH FOR THE PHYSICAL EXAM AND LIFE AFTER THAT

    • Replace excess amounts of fat and carbohydrates with lean proteins, fruits, leafy vegetables and good fats ex. coconut oil, olive oil etc.
    • Avocado bravado! Avocados are great at raising your HDL (good cholesterol) level, which is the primary concern of life insurance underwriters. Underwriters are looking at two cholesterol numbers. One is my total cholesterol and the other is my HDL ratio. I can have a high total cholesterol number but my HDL ratio needs to be excellent. The more good cholesterol I have the better. That is why focusing on foods that improve my HDL before I take my exam can save me a lot of money by avoiding a lower rate class or by qualifying me for a higher rate class.
    • Reduce sugar and salt intake in general and especially 5 to 7 days before the exam, because it is reported that this can affect cholesterol and blood pressure test results.
    • Cut back on alcohol, coffee and those energy drinks. For most these are but a few of the favorite regular indulgences.   Having alcohol show up in my blood work following my life insurance exam, is not something I want. An underwriter is definitely not going to like this either. Overall, helping preserve my liver and being able to show this in the exam is what I strive for. Alcohol is high in calories and sugar and has a direct effect on triglycerides which will show up in the exam.
      A few new ones that I found through my research and did not know about was:
    • Shellfish and/or poppy seeds? Avoid! Reportedly shellfish can easily cause a high cholesterol reading and poppy seeds can give a false positive for opium. Now how true this is, I do not know but someone thought it was and may be worth paying attention to.
    • Scheduling the exam? It is suggested that women not take a life insurance medical exam during their menstrual period, or if they have any kind of vaginal discharge, as it can contaminate the urinalysis.

SO WHAT NOW:

Begin my application and hope to be done in the next 30 – 60 days. If my rating still falls short of the mark despite giving it my best shot, I will be ready to try again, to shop around.  Who knows it may be that I find another insurer who is willing to underwrite me at a better rate.  If I get downgraded because of something on my exam, all I will have to do is fix it and reapply a year later to get my premiums lowered.  The point is, I don’t ever want to feel hopeless. There is always a life insurance policy available if you search long enough.

I am glad for this information gathering process. I would like to feel calm and prepared when taking my life insurance exam and increase my chances of obtaining cheap rates.  Though long and tedious, this process has taught me a lot and while I still have questions, I know that I am undertaking the proper and much needed due diligence in order to plan for my future and that of those that I will live behind when I am long gone.

QUESTIONS FOR FURTHER RESEARCH:

  • Can a trust be named as a beneficiary to a life insurance policy and if so how does one go about setting this up?
  • Does the current Umbrella Policy also provide a form of life insurance coverage?
  • Would un umbrella policy work if one of the coverages is under a different company?

REFERENCES:

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