Life Insurance

A guide to buying life insurance

You’ve probably seen the life insurance commercials in which small children, all wide-eyed and adorable, ask questions like, “Hey, Dad, what’s life insurance?”

While these campaigns are supposed to put a small lump in your throat, most people don’t think about life insurance until they absolutely have to. That usually happens when their financial well-being becomes increasingly intertwined with someone else’s, which can come with getting married, buying a home or, the big one, bringing a child into the world.

Those happy events don’t make the task of buying life insurance any more pleasant — just more urgent.

“It is one of those things that people put off,” said Emilie R. Goldman, a financial planner in San Mateo, Calif. “Most people I talk to are pretty surprised about the amounts they need and often think because they have coverage at work, it’s enough.”

That’s hardly ever the case. So consider this a back-to-basics guide that will help sort out what you need as quickly and efficiently as possible. Buying insurance has a lot in common with ripping off a Band-Aid: You just need to do it and then get on with the business of living.

Below are answers to some of the most common questions that are likely to arise:

What type do I need? 

Most people are best served by a plain-vanilla term insurance policy. At least that’s what many financial planners — who are paid a fee for their advice — will recommend. As the name suggests, these policies pay a set amount if the policy owner dies within the boundaries of the term, typically somewhere between 10 years and 30 years.

Term insurance is simple, the policy features generally don’t vary greatly across providers (other than the cost), and it’s cheap compared with other types of insurance.

A healthy 30-year-old woman might pay $38 a month for a $1 million policy with a 20-year term (men pay $10 more), according to PolicyGenius, an online insurance brokerage. A 45-year-old woman might pay about $48 a month for a $500,000 policy with a 20-year term ($60 for men). Smokers can expect to pay two to three times as much.

But don’t be surprised if you find yourself sitting across the table from an insurance agent who tries to push a permanent insurance policy, like whole life or universal life insurance. Those policies generate higher commissions, so there’s that temptation for the agent.

And even if the agent truly believes in the merits of permanent insurance, which can accumulate a cash value, it is far more expensive, often costing several thousand dollars a year.

Permanent life insurance can, however, be the right choice for people who will always have a need for life insurance. They might include the parents of a child with special needs or a wealthy family who will owe estate taxes.

How much to buy? 

The rule of thumb tossed around most often is to buy coverage worth 10 times the policyholder’s salary. But each family’s needs will vary depending on what amount of income the family is seeking to replace and what other items family members may want, or need, to pay for.

Would you want to take time off from work if a spouse died? Pay off the mortgage (or just receive enough to continue making payments)? Pay for a portion or all of college? Are there any debts that would need to be repaid?

Matt Becker, a financial planner in Florida whose practice focuses on younger families, said working parents should buy enough insurance to replace their income for five to 20 years, depending on how old their children are and whether a spouse or partner could support the children on one income.

“For a stay-at-home parent, you should consider the cost of hiring someone else to perform all of your daily duties,” added Mr. Becker, who created a life insurance guide and a work sheet to calculate how much insurance you’ll need. The costs can add up, particularly when considering child care, buying and preparing meals, chauffeuring children around and the overall job of keeping a household running.

One policy or more? 

Families’ needs will probably change over time, so some individuals may consider buying policies with different expiration dates: maybe a $1 million policy with a 20-year term that gets the children through college and another $500,000 policy with a 30-year term that gets you to retirement.

That’s a strategy suggested by Mark Maurer, president of Low Load Insurance Services, which provides insurance to other fee-only advisers. “You’re layering it for different milestones,” he added.

But since it’s usually cheaper to buy term insurance in bulk, he said it wasn’t always cost-effective to buy policies in increments of less than $500,000.

Buy the policy as soon as the need arises, or even earlier. Pregnant women, particularly late in their pregnancies, may pay more because of their weight and naturally elevated cholesterol levels.

Who should I name as beneficiary? 

The easiest alternative for a happily married couple is to name one another as the beneficiary.

But if both parents die and a minor child is named as a contingent beneficiary, or if a single parent names a child as a beneficiary, matters can get complicated. Surrogate courts will probably get involved.

The simplest and most inexpensive way to avoid this situation is to have the policyholder’s will create a testamentary trust after the holder’s death. The trust is named as the beneficiary, providing instructions for a named trustee, said Steven A. Loeb, a lawyer with Fein, Such, Kahn & Shepard, in Parsippany, N.J.

But that’s not the only option. An individual can also create a revocable living trust, which essentially serves as a will but has the added benefit of avoiding probate, the sometimes-lengthy court-directed process to settle a will. Unlike a will, the trust remains private and doesn’t become a public record, as long as it’s properly funded.

Then there’s the bulletproof option. Parents can name an irrevocable life insurance trust as the owner and beneficiary of the policy. Not only does that protect the money from creditors (helpful for doctors subject to malpractice suits), it also removes the proceeds from the estate for tax purposes.

Life insurance proceeds aren’t subject to income taxes, but the amount is included in the deceased’s estate, said Brett J. Barthelmeh, an estate planning attorney with Squillace & Associates in Boston.

That isn’t a problem for most people, now that the federal estate tax exemption is $5.45 million (double that for married couples). And while there are states with far lower exemptions for state estate taxes — New Jersey is a mere $675,000 and Massachusetts is $1 million — many families don’t set up trusts to avoid those taxes.

Why? Assets left to a spouse are not subject to estate taxes. And the surviving spouse is likely to spend a big chunk of the insurance money anyway. But state estate taxes could become an issue, at least in certain states, if both parents died with substantial policies.

Where to buy it?

 It pays to shop around to see which insurer offers the best price for specific circumstances. And instead of working with a broker exclusively affiliated with a single insurer, work with an independent agent who has access to the top term insurance providers.

That’s important because some insurers may provide better pricing for people who are overweight, while others may be more competitive for policyholders, say, in their 40s and 50s. Financial planners should also have solid recommendations.

What about just buying coverage through an employer? It’s usually not a good idea.

“If you’re healthy, individually underwritten coverage is better than group,” said Byron J. Udell, founder and president of AccuQuote. That’s because employer-provided group coverage doesn’t usually require a medical exam, so workers pay a bit more to account for less healthy people in the mix. Also, employer policies are generally not portable if you switch jobs.

But the biggest mistake people with dependents can make, however, is not buying any term insurance at all.

Read more here.

Four Ways Companies Could Adjust to Imminent Employee Benefits Tax

The Affordable Care Act's "Cadillac tax" is creeping into the picture, starting in 2018. This tax entails a 40 percent increase in employer-provided health care insurance for single plans costing more than $10,200 and family plans over $27,500. As a result, employers are currently working to cut costs that have been rising for years in order to avoid this tax. Therefore, you may be seeing some changes to benefits provided by your employer during this fall's open enrollment period:

1) Encouraging healthy living: A recent survey found that 42 percent of employers were contemplating adding or expanding programs to improve employee health. These programs begin with a health risk assessment and coaching, which may include help to quit smoking, eat better, or manage chronic health conditions, to help employees improve their well-being. All of this is done with the hope that it will ward off future medical expenses.

2) Adjust Coverage: Companies have been raising deductibles, the amount someone pays before insurance coverage kicks in, which lowers the premium or cost of coverage and could cause employees to shop around for better prices. Many companies are also adding surcharges to the cost of coverage for spouses who have other health insurance options. If your spouse is able to get coverage through his/her job, your employer will most likely encourage that option. 

It is also very possible that businesses will cut back on the usage of flexible spending accounts. These accounts allow workers to set aside money before taxes for out-of-pocket medical expenses.

3)  Offer new alternatives: More employers and insurers are attempting to shave costs by providing telemedicine options that connect people virtually with a care provider through a smartphone, tablet or computer for relatively minor conditions. These visits can cost half as much as a trip to the doctor's office, which can run around $100 for people with high deductible coverage.

Some companies also are considering moving their employees to a private insurance exchange. For that coverage, employers give workers a set amount of money and then send them to an exchange that offers several different plans.

4) Wait out the debate: Some employers are choosing to not take action yet until they see what happens with the tax.

Republicans and Democrats are both calling for the repeal of the Cadillac tax because of worries that the threshold that trigger the tax will grow more slowly than the actual cost of care, which means that each year more and more plans will be subject to the tax. 

The Risks of Buying Cheap Insurance

The saying you get what you pay for applies to many parts of life, including insurance. Wanting a great deal is understandable, but it is important that your insurer will be able to provide meaningful help when it is needed. Here are some reasons why cheap insurance might be worthless:

It might not be real. Numbers, especially recent numbers, are hard to come by, but an updated 2015 report from the National Association of Insurance Commissioners found that between 2000 and 2002, the U.S. Government Accountability Office identified 144 fake insurers nationwide that sold fake health insurance to more than 200,000 policyholders, resulting in more than $252 million in unpaid claims.

The NAIC's report also said there are still many fake companies that sell auto, homeowners, rental, life, disability, prescription drug and long-term care policies. And it's evidently a global problem. This year, in England, the Association of British Insurers warned consumers that unauthorized insurance adviser – also known as ghost brokers – were selling bogus car insurance policies.

You're likely underinsured. Sean Scott, a restoration and general contractor in San Diego and author of "The Red Guide to Recovery – Resource Handbook for Disaster Survivors," says many people have been burned by cheap homeowners insurance policies. That doesn't mean your insurance isn't the real thing; even if you have the most ethical insurer in the world, if your premiums are really cheap, your policy may feel fake because there are so many restrictions that barely anything is covered.

Scott offers the example of wildfires that swept through Southern California in 2003 and 2007. He worked with many of the homeowners, but he couldn't help several because of their lackluster insurance policies.

Your claims may be paid at a snail's pace. Granted, this can happen when you're paying big bucks for insurance. But if your payments are going to El Cheapo Insurance, it seems logical that the company specializing in getting the lowest possible premiums from its customers might be a little stingy when it comes time to return some of that money.

And if you do have a cheap insurance policy, here is what to do:

Research your insurer. This would save many a headache caused by bogus insurers. Go to your favorite search engine and start checking out your insurance company.

"Look for companies that have a strong rating with A.M. Best, Moody’s and S&P," O'Dell says, referring to some well-known businesses that have information, such as credit ratings, on financial services. A.M. Best, in particular, is geared toward the insurance industry.

Read the policy. Sounds logical, but plenty of smart people don't. "More than once, clients have shown me a policy they bought through the mail thinking it was a great deal on some life insurance, only to read the coverage and find it was only an accidental death and dismemberment policy. If you die of natural causes, it pays nothing," says David Hardin, president of Hardin Financial Group, a retirement planning firm based in Troy, Michigan.

In addition, be on the lookout for any language in your policy that you don't understand. True, every insurance policy, even the best, has complex language and legalese, but you want to look for a policy that, for the most part, offers fairly clear and straightforward language. And keep an eye out for weasel words – ambiguous phrasing that could mean anything.

Insurance, after all, is all about managing risk and trying to have a happy ending if something terrible happens. If you end up paying for a risky insurance policy, you're already losing.




Why should I buy life insurance?

Many financial experts consider life insurance to be the cornerstone of sound financial planning. It can be an important tool in the following situations:

  1. Replace income for dependents
    If people depend on your income, life insurance can replace that income for them if you die. The most commonly recognized case of this is parents with young children. However, it can also apply to couples in which the survivor would be financially stricken by the income lost through the death of a partner, and to dependent adults, such as parents, siblings or adult children who continue to rely on you financially. Insurance to replace your income can be especially useful if the government- or employer-sponsored benefits of your surviving spouse or domestic partner will be reduced after your death.
  2. Pay final expenses
    Life insurance can pay your funeral and burial costs, probate and other estate administration costs, debts and medical expenses not covered by health insurance.
  3. Create an inheritance for your heirs
    Even if you have no other assets to pass to your heirs, you can create an inheritance by buying a life insurance policy and naming them as beneficiaries.
  4. Pay federal “death” taxes and state “death” taxes
    Life insurance benefits can pay estate taxes so that your heirs will not have to liquidate other assets or take a smaller inheritance. Changes in the federal “death” tax rules between now and January 1, 2011 will likely lessen the impact of this tax on some people, but some states are offsetting those federal decreases with increases in their state-level “death” taxes.
  5. Make significant charitable contributions
    By making a charity the beneficiary of your life insurance, you can make a much larger contribution than if you donated the cash equivalent of the policy’s premiums.
  6. Create a source of savings
    Some types of life insurance create a cash value that, if not paid out as a death benefit, can be borrowed or withdrawn on the owner’s request. Since most people make paying their life insurance policy premiums a high priority, buying a cash-value type policy can create a kind of “forced” savings plan. Furthermore, the interest credited is tax deferred (and tax exempt if the money is paid as a death claim).