It’s linked to lung cancer and heart disease, and is associated with nearly 1 in 5 deaths in the United States.(1) But smoking damages more than your body. It can also seriously hamper your financial health in ways that might surprise you.
The upfront cost of smoking
Cigarettes aren’t cheap. Prices per pack vary from $5.25 in Missouri to $12.85 in New York, but the national average comes out to around $6.28.(2, 3) Smoking a pack per day will run you $44 per week, $188 per month, and $2,292 per year. Over 20 years you’ll have spent $91,671 on cigarettes. That’s a lot of money to light up!
Health care costs of smoking
But smoking carries more subtle costs. Hospital bills, medication, and treatment all cost money, and smoking bumps up your chances of needing those at some point in your future. In total, smoking-related illness costs the United States over $300 billion per year.(4) Smokers also have to face higher insurance costs because of the health risks presented by their habit. All told, smoking one pack per day costs around $15,000 a year, or $40 per pack.(5)
The opportunity cost of smoking
What would you do with $15,000? If you’re smoking a pack per day, your answer is to spend it on a highly addictive chemical that feels great in the moment but will damage your health long-term. But what would happen if you put that $15,000 to work? Could that be the cash you need to start building a business? Maybe that could be the foundation of your child’s college fund or inheritance. That nicotine hit might be what you think you need to destress or get out of bed in the morning, but it’s costing you more than short-term cash. It’s denying you the potential to live on your terms and start building your future.
Quitting cigarettes can feel daunting. They’re an easy coping mechanism that you might depend on. Imagining a day without lighting up with your morning coffee could be downright terrifying. But smoking costs you more than just 6 bucks per pack. It costs you more than your future health. The price of a quick nicotine fix could be stopping you from reaching your full potential and stealing life-changing opportunities.
Trying to quit? Check out these resources from the CDC.
Many people have someone in mind before they purchase their policy. This person or entity can be named as your beneficiary. Naming your life insurance beneficiary helps to ensure that the party you choose gets the proceeds of your life insurance policy, even if your will leaves your estate to someone else. If you’ve decided that you want to provide for a special person or organization through your life insurance policy, it’s important that the beneficiary section will do what you expect.
Here are some simple tips that can help point you in the right direction:
Choosing Your Life Insurance Beneficiary
Who you name as your beneficiary is a deeply personal decision, and there’s no right or wrong answer. Here are some areas to consider:
Note: Contrary to popular belief, you can’t name a pet as your beneficiary — but you can name someone you’d trust to care for your pet. (Sorry, Fluffy.)
Multiple Beneficiaries and Contingent Beneficiaries
You can name multiple beneficiaries for your life insurance policy, but when doing this, it’s better to use percentages rather than fixed dollar amounts. For permanent life insurance policies, like whole life insurance and universal life insurance, the death benefit payout amount can change over time, making percentages a better strategy for multiple beneficiaries.
You can also name contingent beneficiaries. Think of a contingent beneficiary as a back-up beneficiary. In the event that your primary beneficiary passes before you do (or at the same time), the proceeds of your policy would then go to the contingent beneficiary.
Avoid using general designations, such as “spouse” or “children” as your beneficiary. Spouses can change, as divorce statistics remind us, and you never know which long-lost “children” might appear if there’s a chance of a payday from your life insurance policy. In the very best case, general designations will cause delays in payment to your intended beneficiaries.
Choosing a life insurance beneficiary isn’t necessarily complicated, but there’s some room for error in certain situations. While the decision is always yours to make, it’s best to discuss your options with your financial professional to help make sure the settlement goes smoothly and your wishes are honored.
In fact, most people throughout history have had zero outside financial protection in case of an untimely death. So why did life insurance appear? Let’s start by defining what it is.
What is life insurance?
Life insurance is essentially an agreement where people pay a company a premium on a policy that will provide a financial benefit in the case of an untimely death (or if other circumstances occur that are defined in the policy). Let’s say you have a spouse and a few kids. You know that if something were to happen to you it would leave them in a serious financial bind; being down an income could mean moving to a worse neighborhood, serious lifestyle changes, debt, and so on. An appropriate life insurance benefit Life insurance is worth considering if anyone in your life depends on you financially.
Roman soldiers: pioneers of life insurance
So where did the idea of life insurance come from? The first known example of life insurance was in a powerful organization with a high turnover rate: the Roman Army. Burials were culturally significant to Romans but expensive, which was bad news for poor soldiers constantly waging wars across ancient Europe. In response, they started burial clubs. Members of these clubs would cover funeral costs for their fallen comrades. It wasn’t much compared to the complexity of modern life insurance, but it at least provided a basic honor to soldiers and their families in the case of a tragic death.
Coffee Houses and Churches Not much is known about insurance in general after the fall of the Roman Empire. However, another high-risk field sparked its rebirth during Europe’s colonial era in the late 1680s. Merchants, sea captains, and sailors all worked high risk jobs; pirates, storms, and disease were serious threats to shipments and crews. What we think of as insurance was born to protect the pockets of investors in the case of a maritime catastrophe.
The first life insurance company opened in London just a few years later in 1706. The Amicable Society for a Perpetual Assurance Office was founded by William Talbot and required members to pay an annual fee. In 1759, American Presbyterian ministers created an organization to protect families of deceased pastors, with the Episcopalians following suit a few years later.
Something like modern life insurance was beginning to appear. But the next two centuries saw massive economic and social changes that permanently affected the insurance industry. We’ll explore those in part II!
It’s not just a budget. In fact, a solid financial strategy is not entirely based on numbers at all. Rather, it’s a roadmap for your family’s financial future. It’s a journey on which you’ll need to consider daily needs as well as big-picture items. Having a strategy makes it possible to set aside money now for future goals, and help ensure your family is both comfortable in the present and prepared in the future.
Financial Strategy, Big Picture
A good financial strategy covers pretty much everything related to your family’s finances. In addition to a snapshot of your current income, assets, and debt, a strategy should include your savings and goals, a time frame for paying down debt, retirement savings targets, ways to cover taxes and insurance, and in all likelihood some form of end-of-life preparations. How much of your strategy is devoted to each will depend on your age, marital or family status, whether you own your home, and other factors.
Financial Preparation, Financial Independence
How do these items factor into your daily budget? Well, having a financial strategy doesn’t necessarily mean sticking to an oppressive budget. In fact, it may actually provide you with more “freedom” to spend. If you’re allocating the right amount of money each month toward both regular and retirement savings, and staying aware of how much you have to spend in any given time frame, you may find you have less daily stress over your dollars and feel better about buying the things you need (and some of the things you want).
Remember Your Goals
It can also be helpful to keep the purpose of your hard-earned money in mind. For example, a basic financial strategy may include the amount of savings you need each month to retire at a certain age, but with your family’s lifestyle and circumstances in mind. It might be a little easier to skip dinner out and cook at home instead when you know the reward may eventually be a dinner out in Paris!
Always Meet with a Financial Professional
There are many schools of thought as to the best ways to save and invest. Some financial professionals may recommend paying off all debt (except your home mortgage) before saving anything. Others recommend that clients pay off debt while simultaneously saving for retirement, devoting a certain percentage of income to each until the debt is gone and retirement savings can be increased. If you’re just getting started, meet with a qualified and licensed financial professional who can help you figure out which option is for you.
It sometimes feels like an endless jumble of big words and cryptic abbreviations. Add on top of that how stressful talking about the loss of a loved one can be and you’ve got a topic that can seem unapproachable.
It just so happens to be incredibly important.
Life insurance is an essential line of defense for your family in the case of tragedy. It can give them the time and resources they need to grieve and make a plan for the future. But where should you begin? Here’s a quick guide to weighing and understanding your life insurance options.
Term Life Insurance This option provides coverage for a specified term or period of time (10, 20 to 30 years). It’s just pure life insurance and typically your premiums are lower the younger you are.
Universal Life Insurance (ULI) Universal life insurance is a relatively new insurance product that combines permanent insurance coverage with additional features. If the (ULI) is funded sufficiently, it may provide coverage for the duration of your life and depending on how you’ve structured your policy, there can potentially be a cash value. Keep in mind that if you decide to take out loans or withdrawals there may be fees associated with it.* Be sure to meet with an agent to discuss the specifics of a ULI policy.
Whole Life Insurance These policies include a standard death benefit coverage, and with cash value guaranteed on all premiums paid during an insured’s lifetime.** Critical illness riders may also be offered as part of a whole life insurance policy.
Finding the right life insurance policy can be difficult. Call me, and we can review your options to find Whole Life Insurance that’s a perfect fit for you and your family!
Loans, withdrawals, and death benefit accelerations will reduce the policy value and the death benefit and may increase lapse risk. Policy loans are tax-free provided the policy remains in force. If the policy is surrendered or lapses, the amount of the policy loan will be considered a distribution from the policy and will be taxable to the extent that such loan plus other distributions at that time exceed the policy basis. * Any guarantees associated with a life insurance policy are subject to the claims paying ability of the issuing insurance company.
It helps protect your family during the grieving process, gives them time to figure out their next steps, and can provide income to cover normal bills, your mortgage, and other unforeseen expenses.
Here are some guidelines to help you figure out how much is enough to help keep your family’s future safe.
Who needs life insurance?
A good rule of thumb is that you should get life insurance if you have financial dependents. That can range from children to spouses to retired parents. It’s worth remembering that you might provide financial support to loved ones in unexpected ways. A stay-at-home parent, for instance, may cover childcare or education costs. Be sure to take careful consideration when deciding who should get coverage!
What does life insurance cover?
Life insurance can be used to cover a variety of unexpected expenses. Funeral costs or debts can potentially be financial and emotional strains, as can the loss of a steady income and employer-provided benefits. Think of life insurance as a buffer in these situations. It can give you a line of defense from financial concerns while you process your loss and plan for the future.
How much life insurance do you need?
Everyone’s situation is different, so consider who would be financially impacted in your absence and what their needs would be.
If you’re single with no children, you may only need enough insurance to cover funeral costs and pay off any debts.
If you’re married with children, consider how long it might take your spouse to get back on their feet and be able to support your family, how much childcare and living expenses might be, and how much your children would need to attend college and start a life of their own. A rule of thumb is to purchase 10 times as much life insurance as income you would make in a year. For instance, you would probably buy a $500,000 life insurance policy if you make $50,000 a year. (Note: Be sure to talk with a qualified and licensed life insurance professional before you make any decisions.)
An older person with no kids at home may want to leave behind an inheritance for their children and grandchildren, or ensure that their spouse is cared for in their golden years.
A business owner will need a solid strategy for what would happen to the business in the event of their death, as well as enough life insurance to help ensure that employees are paid and the business can either be transferred or closed with costs covered.
Life insurance may not be anyone’s favorite topic, but it can be a lifeline to your family in the event that you are taken from them too soon. With a well thought out life insurance policy for you and your situation, you can rest knowing that your family’s future has been prepared for.
Read on to take a peek into some factors that can determine the amount you’ll pay. An insurance company acts as source of money to pay benefactors in case an insurance contract is triggered. Insurance companies use statistics and probability projections to determine how much money someone should pay into the pool based on the probability that person will make an insurance claim. There are many factors that play into this premium amount, but typically those who are more likely to make a claim are required to pay more into the pool.
How insurance works
The concept itself is relatively simple: bad things happen sometimes and people want to avoid financial ruin that could arise from those bad things. To maintain peace of mind, or sometimes by law, people and/or companies will obtain insurance to reduce the risk of ruin. People also use insurance to “make themselves whole” again after financial issue, such as a car accident or the loss of income.
All those who want to obtain an insurance policy apply to be part of a pool. The insurance company then calculates how many people are in the pool, how much money they’ll probably need to pay insurance claims, then calculate each individual’s risk to the company.
For example, let’s take 500 people who want car insurance, and they drive similar cars in similar driving styles. Out of these 500 people, the company analyzes historical data from the pool and then anticipates that three people per month will make claims. Additionally, the company calculates the claim amounts based on past data and the characteristics of pool members, like driving style, location, and type of vehicle. Then the insurer adds up those claims, divides the amount by the number of members (500 here), and tells each member to pay 1/500th of the claim amount. The result is that no single person is devastated by a single catastrophic event, all 500 people have a way to cover themselves if that event happens to them, and each person only pays 1/500th of a claim each month.
Which factors affect premiums
Which factors affect premiums on an insurance policy vary widely across insurance types. Driving style and vehicle value are obvious determining factors in car insurance. But so are other factors you may not be able to change, like location: those who commute to work spend more time in their cars and thus increase the probability of having an accident, simply for being in the car longer.
Health and life insurance focus on healthy lifestyles. If you’re more likely to live longer and require less medical attention, the lower your premiums. Renters and homeowners insurance consider the value of the property and the contents therein. Insurance policies will also vary based on the amount of coverage they offer. If your fire insurance only covers $2,000 worth of possessions, all things being equal, you’re probably going to pay a lower premium than someone who wants $20,000 of coverage.
Reducing your premiums
To avoid frequently making lower-risk members pay for the claims of higher-risk members, not everyone is thrown together in the same pool. If you can adjust your personal factors so that you’re entered into a different pool, you might see substantial reductions in your insurance premium. Your insurance company or agent should be able to help you identify which factors you score high for in riskiness so you can try to reduce your costs.
For example, if you smoke, quitting may greatly reduce your premiums (although you may have a waiting period like 12 months after you quit in order to qualify as a non-smoker). If you have several speeding tickets, ask how much a driving school certificate might help reduce your premiums.
The takeaway here is that your riskiness is based on a quantification of factors and the probability that any one of those factors will trigger a claim. The expected cost of covering the claim is then multiplied by the probability the claim will occur. Similarly risky people will be grouped together, then asked to pay their portion into the pool of expected claim payouts. Changes you can make in your lifestyle may add up to significant savings with your premiums.
Now you can plan those vacations for just the two of you, delve into new hobbies you’ve always wanted to explore… and decide whether or not you should keep your life insurance as empty nesters.
The answer is YES!
Why? Even though you and your spouse are empty nesters now, life insurance still has real benefits for both of you. One of the biggest benefits is your life insurance policy’s death benefit. Should either you or your spouse pass away, the death benefit can pay for final expenses and replace the loss of income, both of which can keep you or your spouse on track for retirement in the case of an unexpected tragedy.
What’s another reason to keep your life insurance policy? The cash value of your policy. Now that the kids have moved out and are financially stable on their own, the cash value of your life insurance policy can be used for retirement or an emergency fund. If your retirement savings took a hit while you helped your children finance their college educations, your life insurance policy might have you covered.Utilizing the cash value has multiple factors you should be aware of before making any decision.*
Contact me today, and together we’ll check up on your policy to make sure you have coverage where you want it - and review all the benefits that you can use as empty nesters.
*Loans and withdrawals will reduce the policy value and death benefit dollar for dollar. Withdrawals are subject to partial surrender charges if they occur during a surrender charge period. Loans are made at interest. Loans may also result in the need to add additional premium into the policy to avoid a lapse of the policy. In the event that the policy lapses, all policy surrenders and loans are considered distributions and, to the extent that the distributions exceed the premiums paid (cost basis), they are subject to taxation as ordinary income. Lastly, all references to loans assume that the contract remains in force, qualifies as life insurance and is not a modified endowment contract (MEC). Loans from a MEC will generally be taxable and, if taken prior to age 59 1/2, may be subject to a 10% tax penalty.
Unfortunately, it’s not a group of financially secure, middle-aged foodies whose most important mission is hanging out in the kitchens of their paid-off homes, brainstorming ideas about how to make the perfect sandwich. The Sandwich Generation refers to adults who find themselves in the position of financially supporting their grown children and their own parents, all while trying to save for their futures. They’re “sandwiched” between caring for both the older generation and the younger generation.
Can you relate to this? Do you feel like a PB&J that was forgotten at the bottom of a 2nd grader’s backpack?
If you feel like a sandwich, here are 3 tips to help put a wrap on that:
1. Have a plan. In an airplane, the flight attendants instruct us to put on our own oxygen mask before helping someone else put on theirs – this means before anyone, even your children or your elderly parents. Put your own mask on first. This practice is designed to help keep you and everyone else safe. Imagine if half the plane passed out from lack of oxygen because everyone neglected themselves while trying to help other people. When it comes to potentially having to support your kids and your parents, a tailored financial strategy that includes life insurance and contributing to a retirement fund will help you get your own affairs in order first, so that you can help care for your loved ones next.
2. Increase your income. For that sandwich, does it feel like there’s never enough mayonnaise? You’re always trying to scrape that last little bit from the jar. Increasing your income would help stock your pantry (figuratively, and also literally) with an extra jar or two. Options for a 2nd career are everywhere, and many entrepreneurial opportunities let you set your own hours and pace. Working part-time as your own boss while helping to get out of the proverbial panini press? Go for it!
3. Start dreaming again. You may have been in survival mode for so long that you’ve forgotten you once had dreams. What would you love to do for yourself or your family when you have the time and money? Take that vacation to Europe? Build that addition on to the house? Own that luxury car you’ve always wanted? Maybe you’d like to have enough leftover to help others pursue their goals.
It’s never too late to get the ball rolling on any of these steps. When you’re ready, feel free to give me a call. We can work together to quickly prioritize how you can start feeling less like baloney and more like a Monte Cristo.
“To have and to hold, from this day forward…” At a time like this, there are 3 more “I dos” for you to consider:
1. Do you have life insurance?
Any discussion about life insurance is going to start with this question, so let’s get it out of the way! As invigorated as people feel after finding the love of their life…let’s face it – they’re not invincible. The benefits of life insurance include protecting against loss of income, covering funeral expenses, gaining potential tax advantages, and having early access to money. Many of these benefits can depend on what kind of life insurance you have. Bottom line: having life insurance is a great way to show your love for years to come – for better OR worse.*
2. Do you have the right type and amount of life insurance?
Life insurance policies are not “one size fits all.” There are different types of policies with different kinds of coverage, benefits, and uses. Having the right policy with adequate coverage is the key to protecting your new spouse in the event of a traumatic event – not just loss of life. Adequate life insurance coverage can help keep you and your spouse afloat in the case of an unexpected disabling injury, or if you’re in need of long term care. Your life with your spouse isn’t going to be one size fits all, and your life insurance policy won’t be either – for richer or poorer.
3. Do you have the right beneficiaries listed on your policy?
This question is particularly important if you had an existing policy before marriage. Most newlyweds opt for listing each other as their primary beneficiary, and with good reason: listing the correct beneficiary will help ensure that any insurance payout will get delivered to them– in sickness and in health. If you couldn’t say “I do” to any or all of these questions, contact me. It would be my pleasure to assist you newlyweds – or not-so-newlyweds – with a whole NEW way to care for each other: tailored life insurance coverage – ’til death do you part!
Neither World Financial Group nor its agents may provide tax or legal advice. Anyone to whom this material is promoted, marketed, or recommended should consult with and rely on their own independent tax and legal advisors regarding their particular situation and the concepts presented herein.
Any guarantees associated with a life insurance policy are subject to the claims paying ability of the issuing insurance company.
It all comes down to protection. The idea of protecting things like your car or house are pretty common. Even if car insurance weren’t mandatory in most states or provinces, buying it would probably be a good idea. You’d want to make sure you could cover any damages from an accident – especially if you’re at fault. And protecting your investment in your home from the unexpected like an earthquake, fire, flood, theft, etc. is a bit of a no-brainer.
One of the most important things to protect before all others? Your ability to earn an income. Your income enables you to not only buy your car and your house but also the insurance to protect those things. If you were to lose your income, then those things could also be lost if you can’t afford them any longer.
Getting laid off or fired could be a cause of lost income. In that case, you still have the ability to work, which means finding a new job is possible. But in the event of a disability, critical illness, or premature death of a breadwinner? Those situations are a bit tougher to bounce back from – especially that last one.
Before becoming financially independent, a financial situation may typically be less secure, meaning you might have more financial responsibility than wealth. For example, if you don’t have a lump sum of cash to buy a house, you’d need to finance the purchase over a longer period of time via a mortgage. This creates a responsibility to continue making the mortgage payments in full and on time. Losing your income would be devastating since it could affect your payments – and when mortgage payments can’t be made, you might lose your home.
What all of this means: Your ability to earn an income should also be protected. Getting the right type and the right amount of insurance can seem complicated, especially if you’re considering all the different kinds you may need. That’s where speaking with a financial professional might come in handy. If you’re looking to protect the most important aspect of your financial situation (namely, your ability to earn income) and you’d like to see your options, let’s talk. It would be my pleasure to help you get a better understanding of your options.
Any guarantees associated with a life insurance policy are subject to the claims paying ability of the issuing insurance company.
This is a holiday roll-call that’s instantly recognizable: the reindeer that pull Santa’s magical sleigh. But what if things got so hectic at the North Pole (not a stretch when you’re in charge of delivering presents to every child on Earth), that when it was time to hitch up the reindeer on Christmas Eve, they were all out of order?
Prancer. Cupid. Dasher. Comet. Dancer. Vixen. Blitzen. Donner.
Hmmm, someone’s missing…. what happened to Rudolph? (Looks like he got left behind at the North Pole. In all the hubbub one of Santa’s elves forgot to review the pre-flight checklist.)
Since so much can change during the year from one crazy “Happy Holidays!” to the next, your ducks – or reindeer, that is – may not even be in a row at this point. They could be frolicking unattended in a field somewhere! And who knows where your Rudolph even is.
We can help with that. An annual review of your financial strategy is key to keeping you on track for your unique goals. Lots of things can change over the course of a year, and your strategy could need some reorganizing. I mean, did you hear about everything that changed for Prancer? (What do you call a baby reindeer, anyway?)
Here are some important questions to consider at least once each year (or even more often):
1. Are you on track to meet your savings goals? A well-prepared retirement is a worthy goal. Let’s make sure nothing drove you too far off track this year, and if it did, let’s explore what can be done to get you back on the right path.
2. Do you have the potential for new savings? Did your health improve this year? Did that black mark on your driving record expire? Changes like these have the potential to positively impact your life insurance rate, but we’d need to dig in and find out what kinds of savings might be in store for you.
3. Have your coverage needs increased? Marriage, having a child, or buying a home are all instances in which your life insurance coverage probably should be increased. Have any of these occurred for you over the last year? Have you added the new family member as a beneficiary?
If you haven’t had a chance to review your strategy this year, we can fit one in before Santa shimmies down the chimney. Which of your reindeer do you need to wrangle back into the ranks before the New Year gets going?
When we’re young, it seems like our parents and older siblings are just relieved that we’re learning some manners to offset our little legs swinging wildly off the chair under the dinner table, narrowly missing people’s shins. (Hey, it’s hard to sit still at big family meals when you’re that little!) All the grown up talk about far away jobs or how much you’ve grown wasn’t as stimulating as the tooth that had started to wiggle ever so slightly when you bit into some turkey… But at least you remembered to say thank you when someone passed the cranberry sauce!
As we got older, though, those conversations became easier to participate in as we shared our own stories, watched our extended family grow and mature, and then tried to wrangle our own kids into saying “thank you” when they were given a gift by a relative they hadn’t seen in a year.
The biggest lesson we learn about being thankful as we get older? It’s important to show the people we love how thankful we are for them – not just say it. We learn more about the responsibility we have to take care of the people we are thankful for. And at this time of year, we can give our thanks to them by making sure they are financially prepared if we suddenly aren’t around anymore.
Here are 3 ways you can give thanks for your loved ones:
1. Consider getting life insurance. Replacing lost income, covering funeral expenses, gaining potential tax advantages, having early access to money – these benefits of life insurance will give your loved ones a bit of financial stability and let them know how thankful you were for them. However, many of these benefits can depend on what type of life insurance you have, so taking the time to find the right type and amount of insurance for your particular needs and goals is important. Which leads us to the second way to give thanks…
2. Get the right type and amount of life insurance. Life insurance policies are not “one size fits all,” so investing your energy into this step is a key way to give thanks for your loved ones. Different types of policies have different kinds of coverage, benefits, and uses. Having the right policy with adequate coverage is the key to protecting your loved ones in the event of a traumatic event – not just the loss of life. Adequate life insurance coverage can help keep you and your loved ones afloat in the case of an unexpected disabling injury, or if you’re in need of long term care. Your life with your loved ones isn’t going to be one size fits all, and your life insurance policy won’t be either.
3. List the right beneficiaries on your policy. This question is particularly important if you haven’t looked at or updated your beneficiaries in a while. Why? Because listing the correct beneficiary will help ensure that any insurance payout will get delivered to the them. You may need to review your policy’s beneficiaries if you have recently married or divorced, had kids, or maybe even met with a cousin over the holidays who you’d like to leave a little something to!
If you can’t say that the 3 ways above are how you’re going to give thanks for your loved ones this year, give me a call. I’d like to give my thanks to you by assisting you with a whole new way to say “thank you” – tailored life insurance!
*Neither World Financial Group nor its agents may provide tax or legal advice. Anyone to whom this material is promoted, marketed, or recommended should consult with and rely on their own independent tax and legal advisors regarding their particular situation and the concepts presented herein.
Any guarantees associated with a life insurance policy are subject to the claims paying ability of the issuing insurance company.*
Even more daunting can be figuring out what policy is best for you. Let’s break down the differences between a couple of the more common life insurance policies, so you can focus on an even more daunting task – what your family’s going to have for dinner tonight!
Term Life Insurance
A Term life insurance policy covers an individual for a specific period of time – the most common term lengths being 10, 20, or 30 years. The main advantage of this type of policy is that it generally can cost the consumer less than a permanent insurance policy, because it might be shorter than a permanent policy.
There’s a small downside to term policies, and it’s found right in the name: term policy. This kind of life insurance policy does have an expiration date. While you may have the option to convert to a whole or permanent life insurance policy through a conversion rider or you may choose to extend your policy, you may find yourself needing to go through the underwriting process again. Life insurance premiums tend to rise the older you get, so the term policy premium you paid when you first got your policy at, say, 30 years old has the potential to be very different from the ones you’d pay at 50 or 60 years old.
The goal of a term policy is to pay the lowest premiums possible, because by the time the term expires, your family will no longer need the insurance. The primary thing to keep in mind is to choose a term length that covers the years you plan to work prior to retirement. This way, your family members (or beneficiaries) would be taken care of financially if something were to happen to you.
If this doesn’t sound like the right kind of policy for you, there’s another option…
Permanent Life Insurance
Contrary to term life insurance, permanent life insurance provides lifelong coverage, as long as you pay your premiums. And contrary to term life insurance, permanent life insurance can be more complex because of its many parts and therefore harder to understand and know what choices are right for you. This insurance policy – which also can be known as “universal” or “whole” – provides coverage for ongoing needs such as caring for family members, a spouse that needs coverage after retirement, or paying off any debts of the deceased.
Another great benefit a perm policy offers is cash accumulation. As premiums are paid over time, the money is allocated to an investment account from which the individual can borrow or withdraw the funds for emergencies, illness, retirement, or other unexpected needs. Because this policy provides lifelong coverage and access to cash in emergencies, most permanent policies are more expensive than term policies.
There are some key things to keep in mind if you’re considering a Cash Value Life Insurance Policy: It is important to remember that loans and withdrawals will reduce the policy value and death benefit dollar for dollar. Additionally, withdrawals are subject to partial surrender charges if they occur during a surrender charge period. Loans are made at interest. Loans may also result in the need to add additional premiums into the policy to avoid a lapse of the policy. In the event that the policy lapses, all policy surrenders and loans are considered distributions and, to the extent that the distributions exceed the premiums paid (cost basis), they are subject to taxation as ordinary income. Lastly, all references to loans assume that the contract remains in force, qualifies as life insurance and is not a modified endowment contract (MEC). Loans from a MEC will generally be taxable and, if taken prior to age 59½, may be subject to a 10% tax penalty.
And don’t worry too much about the hard to understand parts. A financial professional can give you an idea of what a well-tailored permanent life insurance policy may look like for you and your unique situation.
How Much Does the Average Consumer Need?
Unless you have millions of dollars in assets and make over $250,000 a year, most of your insurance coverage needs may be met through a simple term policy. However, if you have a child that needs ongoing care due to illness or disability, if you need coverage for your retirement, or if you anticipate needing to cover emergency expenses, it may be in your best interest to purchase a permanent life insurance policy.
No matter where you are in life, you should consider purchasing some life insurance coverage. Many employers will actually offer this policy as part of their benefits package. If you are lucky enough to work for an employer who does this, take advantage of it, but be sure to examine the policy closely to make sure you’re getting the right amount of coverage. If you don’t work for a company that offers life insurance, don’t worry, you still may be able to get great coverage at a relatively inexpensive rate. Just make sure to do your research, consider your options, and make an informed decision for you and your family.
Now, what’s it going to be? Order a pizza or make breakfast for dinner? Choices, choices…
You know how it works. If your guess is the closest without going over, you win the prize. And whether it’s a cash pot, a season pass for your hometown’s team – or even just the jellybeans themselves, it’s a situation with a lot at stake. You’ve been presented with a ripe opportunity to prove your keen intellect, not to mention maybe winning some free candy!
You may start pulling out your old high school algebra equations. You may laboriously count the visible jellybeans so you can extrapolate the total. You may even pick the jar up and hold it to the light – shaking it and assessing any gaps in area coverage.
Take your time. It’s a big decision.
Unfortunately for many people, it seems not as much thought goes into estimating how much a life insurance policy may cost. Can you guess how much a policy might cost?
LIMRA’s 2017 Insurance Barometer study shed a little light on just how off these guesses can be: When those surveyed were asked how much they thought a healthy 30-year-old would pay for a $250,000 policy, their median guess was $500 – more than 3 times the actual cost!*
That stat is pretty revealing: odds are that the number you have in mind is a lot higher than what you might actually end up paying for your policy. As a result, it may feel like you’re saving money right now by not having life insurance. But in the case of a sudden illness, the passing of a breadwinner, or an unexpected loss of income, not having (what is potentially affordable) protection for your loved ones feels as silly as writing down a guess of 1,000,000 jellybeans next to the mathematician’s answer of 1,086.
The bottom line: Have you overestimated how much a well-tailored life insurance policy could cost you? Not sure? Reconsider your guesstimate with a financial professional who knows the in’s and out’s of your needs and what coverage may be available that fits your budget. (It’s like knowing how many jellybeans are in the jar before you have to guess!)
“2017 Insurance Barometer Study Reveals That Consumers Want Transparent Life Insurance Buying Options.” Life Happens, https://lifehap.pn/2tMcxwy.
Life insurance companies are more willing to offer lower premium life insurance policies to young, healthy people who will likely not need the death benefit payout of their policy for a while. (Keep in mind that exceptions for pre-existing medical conditions or certain careers exist – think “skydiving instructor”. But in many cases, the odds are more in your favor for lower premiums than you might guess.)
At this point you might be thinking, “Well, I am young and healthy, so why do I need to add another expense into my budget for something I might not need for a long time?”
Unlike a financial goal of saving up for a downpayment on your first house, waiting for “the right moment” to get life insurance – perhaps when you feel like you’re prepared enough – is less beneficial. A huge part of that is due to getting older. As your body ages, things can start to go wrong – unexpectedly and occasionally chronically. Ask any 35-year-old who just threw out their back for the first time and is now Googling every posture-perfecting stretch and cushy mattress to prevent it from happening again.
With age-related health issues in mind, remember that the premium you pay at 22 may be very different than the premium you’ll pay at 32. Most people hit several physical peaks in that 10 year window:¹
If you’re feeling your mortality after reading those numbers, don’t worry! You’re probably not going to go to pieces like fine china hitting a cement floor on your 30th birthday. But there is one certainty as you age: your premium will rise an average of 8-10% on each birthday.² Combine that with an issue like the sudden chronic back problems from throwing your back out that one time (one time!), and your premium will likely reflect both the age increase and a pre-existing condition.
If you experience certain types of illness or injury prior to getting life insurance, it often goes in the books as a pre-existing condition, which will cause a premium to go up. Remember: the less likely a person is going to need their life insurance payout, the lower the premium will likely be. Possible scenarios like the recurrence of cancer or a sudden inability to work due to re-injury are red flags for insurance companies because it increases the likelihood that a policyholder will need their policy’s payout.
A person’s age, unique medical history, and financial goals will all factor into the process of finding the right coverage and determining the rate. So taking advantage of your youth and good health now without bringing an age-borne illness or injury to the table could be beneficial for your journey to financial independence.
That equates to landing a new job roughly every 2.5 years by age 32!
So if you’re feeling the itch to leave your current job and head out for a new adventure in the workforce, the experience you’ve gained along the way will go with you. You may have made some great business connections too, and gotten some fabulous on-the-job-training. All of these things will “travel well” to a new job.
But there’s one thing you can’t take with you: An employer-supplied life insurance policy. While the price is right at “free” for many of these policies, there are several drawbacks that may deter you from relying on them solely for coverage.
1. An employer-provided policy turns in its two weeks notice when you do. Since your employer owns the policy – not you – your coverage will end when you leave that job. And unless you’re walking right into another employment opportunity where you’re offered the same type and amount of coverage, you might experience gaps or a total loss of coverage in an area where you had it before. When you’re not depending on an employer to provide your only life insurance coverage, you can change jobs as often as you please without the worry of the rug being pulled out from under you.
2. The employer policy is touted as ‘one size fits most.’ But it’s not likely that a group policy offered through an employer will be tailored to you and your unique needs. There may be no room for you to chime in and request certain features or a rider you’re interested in. However, when you build your own policy around your individual needs, you can get the right coverage that suits who you are and where you’d like to go on your financial journey.
3. An employer policy may not offer enough to cover your family. What amount of coverage is your employer offering? When you’re first starting out in your career, a $50,000 or even a $25,000 employer-provided policy might sound like a lot. But how far would that benefit really go to protect your family, cover funeral costs, or help with daily expenses if something were to happen to you?
Whether or not your 5-year plan includes 5 different jobs (or 5 entirely unrelated career paths), with a well-tailored policy that you own independent of your employment situation – you have the potential for a little more freedom and security in your financial strategy. And you won’t be starting from square one just because you’re starting a new opportunity.
Long, Heather. “The new normal: 4 job changes by the time you’re 32.” CNN Money, https://cnnmon.ie/1RRxCfl.
The anxiety is not surprising: Members of the Class of 2017 had an average of $39,400 in student loan debt.¹
Nearly $40 grand? For that you could travel the world. Put a down payment on a house. Buy a car. Even start a new business! But instead of having the freedom to pursue their dreams, there’s a hefty financial ball and chain around millennials’ feet.
That many young people owing that much money before they even enter the workforce? It’s unbelievable!
Now just imagine adding car payments, house payments, insurance premiums, and more on top of that student debt. No wonder millennials are feeling so terrible: studies show that graduates with debt experience feelings of shame, panic, and anxiety.² Now is the time to get ahead of your debt. Not later. Not when it’s more convenient or feels less shameful. You have the potential right now to manage that debt and get out from under it.
So how do you get out from under your debt? Sometimes improving your current situation involves more than making smarter choices with the money you earn now. Getting out of that debt ditch means finding a way to make more.
There are 2 things you can monetize right now:
Both have their own challenges. You may not have spent much time in a particular field yet, so not a lot of experience. And what if you’re working a job that has nothing to do with your major? There goes education.
Two speed bumps. One right after the other. But you can still gain momentum in the direction you want your life to go!
How? A solid financial strategy. A goal you can see. A destination for financial independence.
Debts can become overwhelming – remember that stat up there? But with a strategy in mind for the quick and consistent repaying of your loans, so much of that stress and burden could be lifted.
Contact me today. A quick phone call is all we need to help get you rolling in the direction YOU want to go.
That describes 61.9% of U.S. families as of 2017.¹ If that describes your family (and the odds are good), do you have a strategy in place to cover your financial obligations with just one income if you or your spouse were to unexpectedly pass away?
Wow. That’s a real conversation-opener, isn’t it? It’s not easy to think about what might happen if one income suddenly disappeared. (It might seem like more fun to have a root canal than to think about that.) But having the right coverage “just in case” is worth considering. It’ll give you some reassurance and let you get back to the fun stuff… like not thinking about having a root canal.
If you’re interested in finding out more about Term insurance and how it may help with your family’s financial obligations, read on…
Some Basics about Term Insurance
Many of life’s financial commitments have a set end date. Mortgages are 15 to 30 years. Kids grow up and (eventually) start providing for themselves. Term life insurance may be a great option since you can choose a coverage length that lines up with the length of your ongoing financial commitments. Ideally, the term of the policy will end around the same time those large financial obligations are paid off. Term policies also may be a good choice because in many cases, they may be the most economical solution for getting the protection a family needs.
As great as term policies can be, here are a couple of things to keep in mind: a term policy won’t help cover financial commitments if you or your spouse simply lose your job. And term policies have a set (level) premium during the length of the initial period. Generally, term policies can be continued after the term expires, but at a much higher rate.
The following are some situations where a Term policy may help.
Pay Final Expenses
Funeral and burial costs can be upwards of $10,000.² However, many families might not have that amount handy in available cash. Covering basic final expenses can be a real burden, especially if the death of a spouse comes out of the blue. If one income is suddenly gone, it could mean the surviving spouse would need to use credit or liquidate assets to cover final expenses. As you would probably agree, neither of these are attractive options. A term life insurance policy can cover final expenses, leaving one less worry for your family.
Pay Off Debt
The average household in the U.S. is carrying nearly $140,000 in debt.³ For households with a large mortgage balance, the debt figures could be much higher. Couple that with a median household income of under $60,000,⁴ and it’s clear that many families would be in trouble if one income is lost.
Term life insurance can be closely matched to the length of your mortgage, which helps to ensure that your family won’t lose their home at an already difficult time.
But what about car payments, credit card balances, and other debt? These other debt obligations that your family is currently meeting with either one or two incomes can be put to bed with a well-planned term life policy.
Even if you’ve planned for final expenses and purchased enough life insurance coverage to pay off your household debt, life can present many other costs of just… living. If you pass unexpectedly, the bills will keep rolling in for anyone you leave behind – especially if you have young children. Those day-to-day living costs and unexpected expenses can seem to multiply in ways that defy mathematical concepts. (You know – like that school field trip to the aquarium that no one mentioned until the night before.) The death benefit of a term life insurance policy may help, for a time, fill in the income gap created by the unfortunate passing of a breadwinner.
But Wait, There’s More… There are term life insurance policies available that can provide other benefits as well, including living benefits that may help keep medical expenses from wreaking havoc on your family’s financial plan if you become critically ill. One note about the living benefits policies, though: If the critical and chronic illness features are used, the face value of the policy is reduced. It’s important to consider whether a reduction in the death benefit would be a good alternative to using savings planned for other purposes.
In some cases, policies with built-in living benefits may cost more than a standard term policy but may still cost less than permanent insurance policies! And because a term policy is in force only during the years when your family needs the most protection, premiums can be lower than for other types of life insurance.
Term life insurance can provide income protection to help keep your family’s financial situation solid, and help things stay as “normal” as they can be after a loss.
¹ United States Department of Labor. “Employment Characteristics of Families Summary.” Bureau of Labor Statistics, 4.19.2018, https://bit.ly/2kSHDvm.
² “Funeral Costs: How Much Does an Average Funeral Cost?” Parting, 9.14.2017, https://bit.ly/2isoHUC.
³ Sun, Leo. “A Foolish Take: Here’s how much debt the average U.S. household owes.” USA Today, 11.18.2017, https://usat.ly/2hJ7lah.
⁴ Loudenback, Tanza. “Middle-class Americans made more money last year than ever before.” Business Insider, 9.12.2017, https://read.bi/2f3ey3F.
It’s simply the stake you have in something that is being insured – and that the amount of insurance coverage for whatever is being insured is not more than your potential loss.
To say things could become a bit awkward might be an understatement if your insurable interest isn’t considered before you’re deep into the planning phase of a project or before you’ve signed some papers, like a title or a loan.
It’s better for your sanity to understand insurable interest beforehand. Where the issue of insurable interest often arises is in auto insurance. Let’s look at an example.
Let’s say you have a car that’s worth $5,000. $5,000 is the maximum amount of money you would lose if the car is stolen or damaged – and $5,000 would be the most you could insure the car for. $5,000 is your insurable interest.
In the above example, you own the car, so you have an insurable interest in it. By the same token, you can’t insure your neighbor’s car. If your neighbor’s car was stolen or damaged, you wouldn’t suffer any financial loss because it wasn’t your car.
Here’s where it might get a little tricky and why it’s important to understand insurable interest. Let’s say you have a young driver in the house, a teenager, and it’s time for him to get mobile. He’s been saving up his lawn-mowing money for two years and finally bought the (used) car of his dreams.
You might have considered adding your son’s car to your auto policy to save money – you’ve heard how much it can cost for a teen driver to buy their own policy. Sounds like a good plan, right? However, the problem with this strategy is that you don’t have an insurable interest in your son’s car. He bought it, and it’s registered to him.
You might find an insurance sales rep who will write the policy. But there’s a risk the policy won’t make it through underwriting and – more importantly – if there’s a claim with that car, the claim might not be covered because you didn’t have an insurable interest in it. If you want to put that car on your auto insurance policy, the car needs to be registered to the named insured on the policy – you.
Insurable Interest And Lenders
If you have a mortgage or an auto loan, your lender is probably listed on your policy. Both you and the lender have an insurable interest in the house or the car. Over time, as the loan is paid down, you’ll have a greater insurable interest and the lender’s insurable interest will become smaller. (Hint: When your loan is paid off, ask your agent to remove the lender from the policy to avoid any confusion or delays if you have a claim someday.)
Does Ownership Create Insurable Interest?
Good question. It might seem like ownership and insurable interest are equivalent – they often occur simultaneously. But there are times when you can have an insurable interest in something without being an owner.
Life insurance is a great example of having an insurable interest without ownership. You can’t own a person – but if a person dies, you may experience a financial loss. However, just as you can’t insure your neighbor’s car, you can’t purchase a life insurance policy on your neighbor, either. You’d have to be able to demonstrate your potential loss if your neighbor passed away. And no it doesn’t count if they never returned those hedge clippers they borrowed from you last spring.
So now you know all about insurable interest. While insurable interest requirements may seem inconvenient at times, the rules are there to protect you and to help keep rates lower for everyone. Without insurable interest requirements, the door is open to fraud, speculation, or even malicious behavior. A little inconvenience seems like a much better option.