Protecting Your Family From Unexpected Death with Low Cost Life Insurance
Hey, what's up, everyone, Henry here at Disruptive Money Management, and today we're going to be touching on a topic that seems to be weighing on a lot of people's minds, and that has to do with their uncertainty surrounding mortality and using life insurance as a means to protect against it.
I hope this episode is timely for many of you. Not only is September Life Insurance Awareness Month, but as an industry insider, I'm continually looking at what is relevant here and now in my profession as a financial advisor. When our country started to take COVID-19 seriously, applications for life insurance begun going through the roof. The statistics released show that YTD, insurance applications have far surpassed the years before.
Life insurance is not for the insured. It is to protect your loved ones from unexpected death.
And look, I get it. We have a natural tendency to put off the morbid topics and live our lives as usual as it can get. Like many, we also probably get exhausted from the workdays, and when the weekend comes around, we want to de-stress and not worry about financial matters.
But when COVID-19 showed up on our country's doorsteps and the numbers of deaths steadily increased, the fear and panic forced life insurance to the top of many individuals' minds. Now, before you run off to pick up just any type of policy, listen on to better educate yourself on the different kinds of life insurance that are available.
I want to start first and foremost that life insurance is a means to protect what you are trying to build, and for 80% of Americans out there, that is probably also what is needed.
When it comes to life insurance, who is it meant for? It's intended for you if you have dependents that would be affected if you passed away. If you're married and have household debt, how would your significant other pay off the home if your income is no longer there? Would the children's lifestyle be drastically impacted? If your answer to that is yes, then life insurance is right for you.
Life insurance can also be used as a means for businesses to protect key executives. Most companies typically carry what is known as key person insurance. The idea behind this is that the key person has an intrinsic value that is very hard to replace. Perhaps it is the chief executive officer leading the company or the head of sales, leading a talented workforce. Businesses carry key person insurance because the act of replacing a CEO or a very gifted C-suite executive due to untimely death could be a very costly affair.
Additionally, if you have founded or started a company with key partners, you most definitely should be carrying key person insurance on yourself and your business partners. This is an essential part of business planning that often gets overlooked. When you start a company, and it is still in its infancy stage where it's being built, you're probably re-investing every dollar back into the company. If something happens to you prematurely, you most likely would want to make sure your estate gets paid their share of what you have been building. Now, if the company doesn't have the cash on hand to buy out your shares, that could be problematic. Again, key person insurance in this scenario would allow the company to pay your estate, purchase the shares of the company that you own, and maintain business functions.
Lastly, life insurance can also be used as an estate planning tool. If you want to leave a legacy behind to your children and grandchildren, life insurance would be an excellent tool to ensure that something gets passed onto them. Life insurance can also be a means to help cover large estate tax bills if your estate is significant enough to incur taxable liability.
Life insurance comes in three flavors, and those are:
Term Life,
Whole Life, and
Equity-Indexed Life.
The first one is simple enough to understand, but the other two are otherwise known as cash-value life insurance and permanent life insurance. I will state that for probably 80% of Americans out there, term life is all you could need. Especially during this time when you are thinking of just protecting your family, term life is the most simple life insurance.
Term life insurance is designed to cover an individual's life for a pre-determined period at a fixed cost that does not fluctuate over time. Term life is the least expensive way you can protect yourself. It's not sexy, and it doesn't have any bells or whistles that can allow for additional funds to grow, such as the other two, which is why it is dead simple. You pick years that you want to have your life covered for, and if you pass away during that time frame, your beneficiary gets paid the face value of the policy. If you live past the determined time frame, the policy disappears, and you continue on your life without coverage.
Term life insurance is designed to provide you coverage for a pre-set number of years, and you can choose the number of years you want to have. It can be ten years, 20 years, or up to a maximum of 30 years.
When purchasing term life insurance, you want to be thinking of a few things:
How long of coverage do you want the insurance for? Coverage typically starts at ten years, but it can go up to 30 years.
How much coverage do you think you'd need? As a general rule of thumb, you should select a coverage that would, at the very least, cover the outstanding household debt. If you pass away, you want to, at the very least, make sure your family left behind has enough money to pay off the house and other debt obligations. You can also increase the coverage if you want to set aside a more considerable amount so that they can replace a portion of your income. You may also want to consider an amount sufficient to do all of that and send your children to college.
Seek a policy that at a minimum covers any outstanding household debt. From there, you work upwards to cover any other financial concerns: replacement of income, future college expenses, etc.
It's critical to think about these things upfront because you can't go back to amend the terms once you start a term life policy. Once you've been in the policy, you can't go back to increase the coverage amount or extend the duration of coverage. More importantly, life insurance is based on your age when you first purchase the policy. As you get older, your inherent cost to insure yourself steadily increases. Starting a system when you're in your thirties or forties can be relatively inexpensive, but creating it later in life can prove costly.
Term insurance can also be canceled at any time, and you can easily do that by just not renewing your policy. I bring this up because you may opt for a thirty-year policy but find that you have built a sufficient nest egg twenty years down the line and no longer need life insurance coverage. You're not mandated to stay in that term policy for another ten years, and you can easily cancel it when you no longer need it. It is flexible in that sense.
Before purchasing term insurance, you need to consider your health and underlying medical conditions. When you buy life insurance, it is typical to have your medical records pulled, and a medical exam conducted so that the insurance carrier can assess your insurability. I want to stress that during this time, a lot of insurance companies are bypassing the medical exams due to COVID-19. A medical exam involves you answering questions regarding your family's medical background, stepping onto a scale, having your blood drawn, and peeing into a cup. If you're a smoker, expect to pay a premium because of that. You can also expect a higher premium if you have a history of diabetes or other medical concerns.
Term insurance is also the cheapest way you can cover your life. For instance:
A $500k 20-year term coverage for a 30-year old non-smoking male in good health runs approximately $230 a year.
That same policy for a female runs about $200 a year.
Yeah, sorry, guys. Statistics show that women far outlive men, which is why life insurance for them is cheaper.
At a million in coverage for that same criteria, it is $299 for women and approximately $371 for men. If you're in good health and don't smoke or have other underlying conditions, this is an inexpensive way for you to cover your life. For men, it comes out to just about $1 a day for coverage, and for a 30-year old woman, it's about 80 cents a day on average.
If you move the age bandwidth to 40 and using the same assumptions of non-smoking and in good health, it'll run the following:
-For a 20-year half-million in coverage, it'll run guys approximately $378 a year, and for women, the cost is $314 a year.
A 40-year old male who wants a million dollars in coverage over a 20-year term will run approximately $669 a year or the equivalent of $1.80 a day. That same policy for women will run roughly $540 a year.
If we push the age up to 50 years old, it gets incrementally higher. Using the same factors as previously:
A $500,000 policy for men will run about $912 and about $1,725 for a million dollars in coverage.
For women, those numbers come out to be about $710 and $1,256, respectively.
For reference, I'm quoting these numbers through Protective Life Insurance just in case you're wondering where the figures are coming from.
This leads me to my next point of concern. Not all life insurance carriers are created equal. The numbers I provided above are from one insurance carrier, but another carrier could have much higher costs or perhaps even lower.
You may not know this, but not all life insurance carriers are created equal, nor do they all want to be in the business of insuring everyone that's out there. There are life insurance companies with no problems insuring medical marijuana users, but then companies would automatically decline those same people. Some companies would insure cancer survivors, but they wouldn't want to touch you for other companies. Do your due diligence and shop around, or at the very least, if you're working with someone, be sure they can provide you with quotes from different insurance companies. It's preferable to use a broker for these things rather than buying directly from an insurance agent employed by one company because, more often than not, they only have access to one carrier.
Let's break down some myths because I hear these myths from individuals as a barrier to buying life insurance.
Myth #1: All insurance carriers are the same.
Insurance carriers all have different criteria on how they gauge risk and the cost associated with it. I provide a lot of term life insurance solutions for my clients, and as an example, a few years back, AIG was probably the lowest cost carrier for term life. Then it became Banner Life, and now both of those are more expensive than Protective. Carrier prices can change as they start insuring more lives and take on more risk, so it is essential to rate-shop when purchasing term life.
Myth #2: I can't get insured because I have an underlying medical concern.
This myth is also not true. Insurance carriers have adapted to the times, and in today's day and age, I'm finding more carriers offering insurance to cancer survivors. Certain carriers have preferential rates for diabetics and other underlying medical conditions. It is always good to be upfront about these with your insurance broker so that they can find the most appropriate carriers for your situation.
Myth #3: Life Insurance is too expensive.
As I showed in the examples above, term life is the least costly insurance to have when it comes to protecting your loved ones. If you start early enough and in good health, you're looking at around a dollar a day on average to two bucks a day for coverage.
Myth #4: I smoke, so therefore I can't get coverage.
This one is also not true. Whether it is nicotine or marijuana, insurance carriers will provide coverage. Marijuana is the trickier one, so the selection for coverage may be slim, but they are out there. The majority of carriers will insure those who smoke, but be forewarned; you will be paying a very hefty premium for that.
If you've stopped smoking for a couple of years already, you're probably in the clear to be approved for non-smoker rates. Additionally, if you were designated with smoker rates and quit smoking for good, you can always return to the life insurance carrier to reassess the rate. During that time, you'll conduct a second medical exam, and if successful, they'll drop the risk category to non-smoker status. You mustn't lie about this because not only is it insurance fraud, but if caught, the claim can be denied.
And there you have it, folks. I hope during these unprecedented times, the information regarding life insurance was helpful to you. If you have been on the fence about getting coverage or considering getting coverage, I strongly recommend working with an independent agent. Independent agents, like myself and my firm, can help you get a policy that works for you. Independent agents are not beholden to a single carrier and can look across multiple insurance companies to find the best rates that fit your lifestyle and needs.
Until next time, I wish you all the very best. Stay safe, stay healthy, and have a productive rest of your week.
Non-smokers and those living a healthy lifestyle can have life insurance coverage for a minimal cost.