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.

Read more

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.

Read more

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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