Life Insurance

Occasionally, I hear a client or prospect share that they have heard financial “experts” say that permanent life insurance coverage is a waste of money and they just need to buy term insurance. We know that for many clients, permanent life insurance provides flexible, lifetime coverage and is often a good option to help protect a family or business. However, in a situation where the client’s needs are short-term or resources are truly limited, a level term product can provide an affordable solution that is a good first step towards helping address a client’s problems

Term Products Overview

Term life insurance provides protection for a limited period, or the term of the policy. The death benefit is paid if the insured dies within that specific term period. If the insured survives the term, the policy ends and no benefits are paid. Many term policies have a conversion privilege, which allows an exchange to a permanent policy without underwriting.

Three Primary Types of Term Insurance

Yearly Renewable Term (YRT) has premiums that begin low and increase each year. The policy renews each time a premium is received until the policy ends.

Level Term has a premium guaranteed to remain level for a stated number of years. At the end of the level term period, many plans can continue as a yearly renewable term at a substantially higher, increasing premium.

Return of Premium (ROP) has a level premium with an option to have some (or possibly all) of the premium returned. When the term period ends, 100% of the premium is returned and the policy expires. If the policy is surrendered before the term ends, only a portion of the premiums paid, if any, will be returned. These plans are more expense than other types of term life insurance.

Things to Consider

  • Net Cost – the net cost of term insurance is equal to the total premiums paid for coverage. Since premiums increase with the age of the insured, a term product may be the most expense form of insurance in the end. It is a very real possibility that the insured could end up with a continuing need for life insurance, but be unable to afford the higher cost.
  • No Flexibility – There is no flexibility in death benefit or premium. If the premium is not paid, the policy will lapse. Coverage cannot be increased or decreased.
  • Conversion Privilege – A product that offers a conversion privilege provides the policy owner with an option to keep coverage beyond the normal term period by exchanging the policy to permanent insurance. There is usually a limited timeframe to convert the policy.

Remember, all products are unique and will vary depending on the issuing company. The key is to understand your needs and the products tradeoffs, so you can have a better understanding. If you are the Southeast I am here in and can help you understand each product type through a policy audit.

Cash Value life insurance is a type of life insurance policy that pays a death benefit when an insured individual dies, and it builds value during the life of the policy holder.

Permanent life insurance can be boiled down to a simple definition: its life insurance with a savings component. It allows the owner to have life insurance inforce for as long as they choose and allows them to build a substantial asset that they can add to their personal financial statement.

Permanent life insurance is absolutely not for everyone. It’s certainly not for those who are low income or overburdened with debt obligations that they are struggling to pay. The cost of permanent life insurance is substantially higher than term life insurance and most professional financial advisors would steer you away from this product if you total household income is less than $50,000 per year.

Related Articles:

Cash Value Life Insurance 101: Should I Consider Permanent Life?

What Does Cash Surrender Value Mean?

Is A Last Survivor Insurance Policy Right For You?

 

Applying for life insurance is a simple process for most. Let’s take a look:

1: Submit the paperwork

The company you are dealing with will need to get some preliminary information about you to start the underwriting process. The paperwork require that you supply your personal identification information, current job status, income information, and health background.

Some insurance carriers will require a proof of income as well, so be prepared to supply a most recent paystub or tax return.

Additionally, you will sign a few forms that will allow your medical records to be released to the insurance company for review.

2: Complete a phone interview

Once you have supplied the life insurance company with your application, they will want to schedule a phone interview with you to discuss your decision with you and to gather some additional information needed for underwriting. It is extremely important that you are open and honest with the interviewer. All of these calls are recorded and will be reviewed if you die within a certain window of time. If it is proven that you lied in the application or the phone interview, the insurance company may deny the claim.

3: A medical exam, performed by a company hired by the insurance carrier.

A paramedic will call you to set up an appointment to do a basic health screening. They are typically available 7 days a week and they will come to your house and your place of work. Be prepared for them to take your blood pressure readings, resting heart rate, draw a blood sample, and have you pee in a cup.

4: Wait

For the next few weeks an underwriter will review the application, medical records, and the results from the health exam. During this process they may reach out to you for additional clarification on certain items, but many times you won’t hear anything at all. It’s during this process that you rates will be factored.

5: Application Approval or Decline

The underwriter will make a decision on if they believe you are insurable. Some people do get declined, and if you do, don’t worry. The insurance company will release your medical records that you can take to your doctor to get whatever health issue you have checkout out. If you are approved, you will receive an approval letter with an offer of insurance along with the rates you will need to pay to keep the policy inforce.

6: The policy goes into effect

Once you sign your acceptance of the policy, you will need to immediately make a payment to satisfy the inforce requirements.

You will receive an official policy by mail. Be sure to store it in a protected place and let the beneficiaries know where to find it should something happen to you.

 

Insurance companies have created calculators that offer multiple methods for determining the value of a human life. These methods are:

  1. Debt; Income; Education (D.I.E Calc.)
  2. Survivors’ Needs (the difference between future expenses and income)
  3. Lost Future Family Income (method developed by the federal government)
  4. Multiple of Earnings

In this post, let’s take a look at an example using the DIE Calculator. Debt; Income; Education is a simplified calculation and the inputs are a condensed version of the more complete list of Questions I always ask business owners about their current financial protection plan. Here’s an example based on business owner in the construction industry that I work with regularly:

  • DEBT
    • Financial Obligations of the Business: $350,000 building loan, $225,000 Equipment Debt, $12,300 Accounts Payable, $55,000 credit line, 45,000 vehicle loans, $75,000 3 months payroll
    • Personal Debt (Mortgages, Loans, Credit Card): $300,000 mortgage, $6000 credit card
  • INCOME
    • Annual Income Need for Spouse $50,000
    • Number of Years Needed: 20
  • EDUCATION
    • Child #1 Age: 10
    • Child #1 Type of Schooling (public/private) public university
    • Child #2 Age 15
    • Child #2 Type of Schooling (public/private) public university
    • What percentage do you expect to pay? 100%

Total Life Insurance Needs Based on DIE: $ $2,268,300

Less Existing Life Insurance Currently Inforce: $1,000,000

Additional Life Insurance needed based on the DIE Calculator: $1,268,300

 

This method does a pretty good job figuring out how much life is needed for many small business owners and for the personal needs of individuals outside of business. Once your business reaches a certain size you should consider a more in depth analysis, but if you have nothing in place currently, this is a great place to start!

Next week, we’ll dig into a more popular method for non-business owners: the Survivors’ Needs Analysis.

Questions I always ask business owners about their current financial protection plan.

Business Continuation

Who are the shareholders in the business and what percentage do they own?

Are there any inactive owners?

If you died today, what would the business status be at death? Continued by heirs? Sold to surviving owners? Sold to Key Persons? Liquidated?

Do you have a written Buy Sell Agreement?

If there is no Buy Sell agreement, how will remaining owners determine how much to pay your heirs?  Will they pay them enough?

If you do have one, what date was your Buy Sell Agreement was last reviewed?

What type of Buy Sell Agreement is it? Cross Purchase Plan? Stock Redemption? Unsure?

What is the approximate value of the business?

How did you come up with thus valuation? (Book Value, Capitalized Earnings, From Attorney or CPA?)

Is the business growing? If so, at what rate?

How do you plan to fund a buyout? (Life Insurance, Sinking Fund, Bank Loan?)

Regarding Key Person Protection & Employee Retention

Who else, other than you, is critical to the operation and proifability of your business?

Do you currently have any protection against the loss of a key employee?

Do you want to retain the key employee(s)? (i.e. through a private bonus, or golden handcuff plan)

If a Key Person dies, would you feel obligated to help provide continued family income with personal life insurance?

Business Debt Protection

How would you repay business debts should you (or one of the other owners) die prematurely?

How much long term debt does the business have? (i.e. Buildings, Land, Heavy Equipment)

How much short term debt does the business have? (Contents of buildings, vehicles, revolving credit line)

Who signed the note at the bank? Owners? Spouses? Business?

Personal Long Term Disability Coverage for Owners

What sources of income will be available to you and your family if you are unable to work due to illness or an accident? What would the impact be on the business?

What is your gross annual income? What is your Spouse's gross annual income?

Any other sources of income? Rentals?

What is your mortgage balance and monthly payment?

How much other personal debt do you have?

Do you plan to pay for your children's education if they decide to go?

Personal Life Insurance Coverage for Owners

Who presently depends on your income? (rule of thumb is at least 10x your income for personal coverage)

Do you have any special needs children?

If you intend to pay for your children's college education, what percent? Will they go to a public or private school?

Do you want to provide continued spousal benefit? If yes, how much income do you want to provide annually?

Do you have any other life insurance? (subtract this amount from your total need that we come up with)

Estate Protection

Have you made any specific plans for conserving and distributing your assets when you die?

Do you have a will?

When was your will prepared?

Do you have a trust in effect?

Do you have any anticipated family inheritances?

What is your estimated net worth?

Which of the following estate planning objectives are most important to you? Avoiding probate, minimizing taxes, equalizing the estate among children, provide for spouses, paying of debt, making charitable gifts, providing for grandchildren, providing college education.

Problem:

Knowledgeable business owners know their business runs several risks for which life insurance is a prudent purchase. These include such things as key person indemnification, debt-protection, stock-purchase funding, and funding for carefully selected employee benefits. Sometimes, meeting these needs creates unnecessary, multiple policy charges and processing fees.

Solution:

Let me audit your existing insurance program or design a new program to make sure your insurance premiums work as hard as possible for you. Sometimes this may only save a modest amount of money, but it will always simplify things for you.

Often, one policy can be designed to do double, triple, or even quadruple duty. One policy can provide key person and debt protection, as well as funding for stock purchase and employee benefits. This simplification and efficiency in premium use can help make sure hard-earned dollars work harder for you.

Here’s an example of “premium shaving” for a business that wants to insure an owner who is a 45-year-old male, at standard non-smoker rating:

# of Polices 4 # of Policies 1
Key Person $100,000
Debt Protection $250,000
Stock Redemption $500,000
Deferred Compensation $150,000
Total Insurance $1,000,000 Total Insurance $1,000,000
Total Premiums $12,562 Total Premium $12,100

 

*Premiums in this post are for illustration purposes only and it provides only general information.

Unfortunately, a lot of people haven't considered the fact that one day they may become disabled. Most will readily admit that contracting cancer, having a stroke, or sustaining a long term disabling injury is a real risk, but all too often those same people say it won't happen to them.

Your income is such a valuable asset, but for many, it is something that is assumed and even taken for granted. When I discuess this exposure with the business owners I serve, I always as the same question:

How long could you go without an income?

Let's assume you have a savings rate of 10% of your annual income per year. Just one year long disability could wipe out 10 years of savings just to support you while you recover! Now what if you couldn't work for 2 years, 5 years, or what if you contract Myasthenia Gravis like my uncle and become bedridden for many years?

Having an income during this painful time, doesn't make the situation better, but it sure does relieve a huge burden for you and those supporting you. And the cost to provide that protection is not nearly as expensive as you might think.

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Here's how long term disability insurance works:

What are the chances of becoming disabled?

  • rovides a smooth transition of control and ownership
  • Avoids ownership by unwanted parties and potential disagreements about business decisions
  • Reassures creditors, suppliers, customers, and employees of the continued viability of the business
  • Helps ensure the legacy of your business

What are some claim examples?

  • Binding on all parties and prevents future negotiations and disputes
  • Locks in a buyer for the business interest
  • Helps ensure your heirs will receive a fair value when they sell
  • Time frames and payment terms are agreed upon ahead of time
  • Helps make sure the active owner(s) retain control of the business

The Insurance That Replaces Your Income

  • Liquid cash is immediately available upon an insured owner's death
  • Tax-deferred growth of cash value
  • Death Benefit is generally received income tax free
  • Disciplined means of setting aside funds
  • Policy cash value can be used toward a lifetime buyout or for financial emergencies

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Life Insurance for Grading Contractors

Life insurance is one of the most important insurance products that you’ll ever buy for your family's business. It’s one of the best ways that you can ensure that your business and your loved ones will be taken care of, regardless if something tragic happens to you. We know that talking about life insurance and what you're needs may be can be a difficult process, but there are factors that can the process even more difficult.

Insurance protection helps you plan for an uncertain future. Yet, not enough business owners leverage life insurance for what is certain: their departure from their business. Whether it comes from retirement, long term disability, or death, one day you will no longer be at the helm of your organization and failing to plan for this transition can be the greatest threat to your family business's survival.

We all know that not planning ahead is bad for us and our business, and significantly reduces the chance of our business successfully transitioning to the next generation. As a leader in insuring family business in the construction industry for the last 50 years,  you can bet that my insurance company pay close attention to the data.

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Ask yourself:

  • Is Your Spouse Or Child Ready To Run Your Business?
  • Are Your Employees Ready To Report To Your Spouse or Child?
  • Is Your Family Ready To Have Your Spouse or Child Take Over The Business?
  • Are Your Creditors And Customers Ready And Willing To Do Business With Your Spouse or Child?
  • Have Your Adequately Prepared For Your Exit From The Business?

As a result of not planning early, unfortunately for contractors and non-contractors alike, finding life insurance at an affordable rate can be a daunting proposition. Life insurance for grading and excavation contractors can sometimes cost double to four times more for life insurance than non-contractors. This is due to the increase risk from the operation of heavy machinery which can cause an increase in mortality ratings.

Quick Guide to Life Insurance for Grading and Excavation Contractors

  • The Reality of Contruction Safety
  • North Carolina Experts in Insurance Underwriting and Risk Assessment
  • Questions to Expect from Life Insurance Underwriters when Applying for a Life Insurance Policy
  • Preferred Best Rates for Grading Contractors
  • Standard Rates for Grading Contractors
  • Why work with Aaron Peacock from North Carolina?
  • Is Affordable Life Insurance Available for Grading Contractors Who Operate Machinery?

In this post we’ll provide a little advice and a few ideas on things to thing about when looking for life insurance or long term disability insurance coverage as a grading or excavation contractor. We’ll also walk you through the process of getting a firm quote for life insurance to help ensure you get the insurance you and your family need.

Regardless of your current health status or business status, I am here to help you to understand your needs and find an affordable life insurance plan to protect your family and your grading business. If you were to pass away unexpectedly, your loved ones could be left with a massive amount of debt and unpaid expenses. Your bonding surety may no longer issue performance or bid bonds. The lender for your equipment may reach out in concern over the equipment notes. Not having adequate life insurance to provide a runway of working capital after your death could cause your employees to start looking for jobs elsewhere.

How Much Life Insurance Do I Need?

Calculating how much life insurance your grading business needs totally depends on what your ideal succession plan looks like. Should you die in the next 5 minutes, who would take over the business? Would your spouse or child legally inherit your assets including the business? Would you prefer that a key employee or other specified individual take it over and pay your surviving family a fair market value? These are all items that you will need to decide. For the sake of simplicity lets look at three different avenues that your business can take should you die prematurely:

  1. At time of death your spouse or child Inherits the business and wants to continue to run
  2. At time of death your spouse or child Inherits the business and wants to sell it
  3. At time of death a key employee or specified individual buys the business from your surviving family for a pre-decided price

Let's look at a calculation that alleviates the stress of both options 1 and 2:

If your ideal succession is for your child or spouse to continue to run the business and continue the legacy that you have built, then I have created a simple and easy to use formula to figure out how much life insurance your business should buy on you. I call it the DIG CALCULATION:

  1. DEBT
  2. INCOME
  3. GIVING

Finally, there is option three. What most specialized contractors call this is a "Buy Sell Agreement" and here are the steps to pursue if this is what you would like to happen.

Step 1: Get a current business valuation

Step 2: Decide who you would like to buy your shares of the business in the event of your death. Is it your current partner? A key employee? A competitor?

Step 3: Hire an attorney to draft a written and legally binding buy-sell agreement

Step 4: Fund the buy-sell agreement with life insurance

Learn more about this in this post: The Simple 4 Step Process To Business Succession Planning with a Buy-Sell Agreement

Planning for your business future is of utmost importance and have a thought out plan in place will give you peace of mind knowing that you have all your bases covered.

Here are some additional tips and resources to help you with buy-sell agreements:

  • Top Attorneys For Buy-Sell Agreements in Western North Carolina
  • Get a Free Business Valuation
  • How Buy-Sell Agreements Work...A Definitive Guide
  • Permanent or Term Life Insurance For Buy-Sell Agreements
  • What About the Real Estate? The Often Missing Piece in Buy Sell Agreements
  • Do I need a disability clause written into my Buy-Sell Agreement?
  • Buy Sell Agreement Check Up

What Factors Affect The Price of Life Insurance

The cost of life insurance can vary significantly due to many factors ranging from health to age to job duties and much more. Let's dive in to some of them and take a look at some sample rates to maybe give you a better understanding. No matter what the rating you get is, you still have to decide on whether you have a true need for the coverage. Think about it this way: If you just purchased a $400,000 GPS Controlled state of the art piece of equipment, would you leave it uninsured? Absolutely not.

So here are the top 4 things that affect the price of your life insurance:

  1. Health
  2. Age
  3. Medical History
  4. Tobacco Usage
  5. Family Health History
  6. Job Duties
  7. Lifestyle

What Are Your Best Rates For Grading Contractors?

Now, keeping in mind that the price can vary significantly based on the above factors, lets take a look at what my average grading contractor client looks like and give you some examples on the actual price differences when we adjust the different factors.

Mr. Grading Company Owner is 56 Years Old and has a well  established firm that employs approximately 30 people during his peak season. He no longer works I the field and spends most of his time working at his office communicating with clients and working on estimates. Outside of work, Mr. Grading Company Owner spends time with family and enjoys travelling to the beach and playing golf on occasion. From a health standpoint, he does not work out, but he attempts to eat some what healthy most of the time. He does not smoke does enjoy cold beer. Mr. Owner takes some blood pressure medication, but has no other health issues.

Let’s look at some different situations, and some of the estimated the prices you’ll be looking at:

Let’s say Mr. Owner gets a standard health rating for a 56 year old male.  Here are the prices for $1,000,000 of coverage with some different options

  • 10 Year Term:
  • 20 Year Term:
  • Permanent:


Now let’s say Mr. Owner is a smoker and gets a smoker rating for a 56 year old male.  Here are the prices for $1,000,000 of coverage:

  • 10 Year Term:
  • 20 Year Term:
  • Permanent:

 

Finally, let’s say Mr. Owner is a smoker, has some health issues, and some family  medical history that makes him a higher risk. Here are some quotes for $1,000,000 with an increase risk rating

  • 10 Year Term:
  • 20 Year Term:
  • Permanent:

As you can see the  ratings and prices vary.  It's is easy for people to get caught up in the rating and the cost of the insurance and get cold feet into buying the protection.  Try your best not to let this happen to you. If you have a need, you need the coverage. Think about it this way. A higher rating means you have a higher mortality risk and in effect a greater need for the coverage. This is why life insurance costs more for scuba divers, motorcycle racers, and rock climbers, but they still buy it because there is an increased risk. If things change for the better, if you quit smoking, lose weight, or stop racing motorcycles, we can reapply and get a rate reduction.  That said, once you get approved, we will never come back and rerate you even if you contract a major illness.

 

Other Uses Of Life Insurance For Grading and Excavation Companies

Planning for business sucession is the biggest uses of life insurance for grading contractors, but there are many other uses that are also extremely useful to you as a business owner. Here are a few:

1.  Personal Needs

  • Personal Debt Protection
  • Long Term Income Protection if Disabled
  • Continued Income for Spouse and Children
  • Paying For Children's Education
  • Leaving A Legacy Gift
  • Estate Planning
  • Retirement Supplementation

2. Business Needs

  • Business Succession Planning
  • Key Person Protection
  • Employee Retention and Benefits
  • Employee and Executive Bonus Plans
  • Business Debt Protection
  • Strengthening of Balance Sheet

Over the next few weeks I will be outlining each of these and will hopefully give you a clearer understanding of all of the uses of life insurance for Grading Contractors. Stay Tuned!

Why Work With Aaron Peacock?

I'm am a top producing commercial insurance professional with licenses in property & casualty, workers compensation, life & disability, and group health insurance. I am an Appalachian State University alum currently living in Hickory North Carolina and my  office is located in my alma mater's city of Boone North Carolina. I am considered an expert in designing policies for grading contractors and I insure many grading and excavation firms in the western half of the state. In addition to performing at a very high level in my role as my client's insurance partner I am also engaged to be married to my fiancé Anna, who is a kindergarten teacher and master chocolate chip cookie baker. I am a volunteer and proud supporter of Appalachian State's Walker College of Business where I have been asked to speak about relationship marketing & direct sales, personal productivity, career development, and personal finance to the students enrolled in the business school.  In our spare time, Anna and I enjoy walking our dogs Sophie & Bruce, playing yard games and grilling out on our Big Green Egg, riding mountain bikes, and getting out on the water on some stand up paddle boards.

 If you are ready, feel free to request a life insurance quote on this site – here's the link aaronpeacock.com/free-quote or call me at 828-434-3215 or email me at aaron@aaronpeacock.com. It’s easy, fast, safe and always secure. 

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Aaron Peacock

Aaron Peacock

Hi, I'm Aaron and I'm a marketing representative for Federated Mutual Insurance Company - a Ward's Top 50 and an A.M. BEST A+ Superior rated insurance carrier. After my wife was severely injured in an accident involving a distracted driver, I've found one of my passions in life is to help educate people about the Danger of Distracted Driving and have started speaking to businesses in Western North Carolina on implementing the Federated Insurance DriveS.A.F.E. program. Click here to read more...

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