Category: Life Insurance

This article was obtained from Forbes
Link to Original Article: http://www.forbes.com/sites/timmaurer/2016/01/05/10­things­you­absolutely­need­to­know­about­life­insurance/#2715e4857a0b298e748b3872
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Life insurance is one of the pillars of personal finance, deserving of consideration by every household. I’d even go so far as to say it’s vital for most. Yet, despite its nearly universal applicability, there remains a great deal of confusion, and even skepticism, regarding life insurance.

Perhaps this is due to life insurance’s complexity, the posture of those who sell it or merely our preference for avoiding the topic of our own demise. But armed with the proper information, you can simplify the decision­ making process and arrive at the right choice for you and your family.

To help, here are 10 things you absolutely need to know about life insurance:

1. If anyone relies on you financially, you need life insurance. It’s virtually obligatory if you are a spouse or the parent of dependent children. But you may also require life insurance if you are someone’s ex­spouse, life partner, a child of dependent parents, the sibling of a dependent adult, an employee, an employer or a business partner. If you are stably retired or financially independent, and no one would suffer financially if you were to be no more, then you don’t need life insurance. You may, however, consider using life insurance as a strategic financial tool.
2. Life insurance does not simply apply a monetary value to someone’s life. Instead, it helps compensate for the inevitable financial consequences that accompany the loss of life. Strategically, it helps those left behind cover the costs of final expenses, outstanding debts and mortgages, planned educational expenses and lost income. But most importantly, in the aftermath of an unexpected death, life insurance can lessen financial burdens at a time when surviving family members are dealing with the loss of a loved one. In addition, life insurance can provide valuable peace of mind for the policy holder. That is why life insurance is vital for the bread winner of a single­income household, but still important for a stay­at­home spouse.
3. Life insurance is a contract (called a policy). A policy is a contract between a life insurance company and someone (or occasionally something, like a trust) who has a financial interest in the life and livelihood of someone else. The insurance company pools the premiums of policyholders and pays out claims—called a death benefit—in the event of a death. The difference between the premiums taken in and the claims paid out is the insurance company’s profit.
4. There are four primary players, or roles, in a life insurance policy. These roles belong to the insurer, the owner, the insured and the beneficiary. The insurer is the insurance company, responsible for paying out claims in the case of a death. The owner of the policy is responsible for premium payments to the insurance company. The insured is the person upon whose life the policy is based. The beneficiary is the person, trust or other entity due to receive the life insurance claim—or death benefit—in the case of the insured’s passing. For example, I am both the owner and the insured for two life insurance policies (with two different insurers, as it happens). My wife is the beneficiary of each. We walk through the numbers together at least annually (and after major arguments, to prove that I’m still worth more alive!).
5. Life insurance is a risk management tool, not an investment. While some life insurance policies have an investment feature that can offer a degree of tax privilege, insurance is rarely an optimal investment. There’s usually a better, more efficient tool for the financial task you’re trying to accomplish. If you haven’t yet filled up your emergency cash reserves, paid off all non­mortgage debt, maxed out your 401(k) or Roth IRA, contributed to an education savings plan (where appropriate) and set money aside for large purchases you expect in the next decade, then you likely need not concern yourself with types of life insurance that contain an investment component. (You’ll see why in #7.)
6. There are two broad varieties of life insurance about which you should become aware—term and permanent. Term life is the simplest, the least expensive and the most widely applicable. With term life, a life insurance company bases the policy premium on the probability that the insured will die within a stated term—typically 10, 20 or 30 years. The premiums are guaranteed for the length of the term, after which the policy becomes cost­prohibitive to maintain or you decide to let it lapse. Yes, this means that you may very well pay premiums for decades and “get nothing out of it.” But that’s good news, because it means you’re winning at the game of life.
   
   Permanent life insurance includes this same probability­of­death calculus, but also includes a savings mechanism. This mechanism, which is often referred to as “cash value,” is designed to help the policy exist into perpetuity. Whole life the original—has an investment component much like bonds or CDs (but backed by the insurance company). Variable life offers investment options more like mutual funds. Universal life was designed as a less expensive permanent life insurance alternative with added flexibility, but increased interest rate risk for the owner. Although they tend to be more complex and expensive, there are financial dilemmas—often related to business planning and/or high­ net ­worth estate planning—for which permanent life insurance may be the only solution. There are a few select instances where permanent policies are engineered to maximize the tax­privileged growth of cash value. They are, however, only appropriate for a small number of people and still dependent on numerous other factors to work the way they’re intended.
7. Life insurance can be extremely expensive, but it can also be surprisingly inexpensive. If you apply for a bells­and whistles permanent policy, the size of the premiums alone might cause you to need a life insurance benefit right then and there. But most people are pleasantly surprised when they see the relatively low premiums of a plain­vanilla term policy. A healthy, non­smoking, 30­something male, for example, might pay less than $500 per year for a 20­year term policy with a million dollar death benefit. That same individual might be required to pay 10—or even 20—times as much for a variable or whole life insurance policy with a matching death benefit. No, a term/perm comparison is not apples­to­apples. I would hazard to guess, however, that a recent widower cares little for bellsand­whistles but a great deal for the death benefit. Of course, a smoker will likely pay twice as much for any of the above. Someone with health problems could pay triple or more (or simply be declined for coverage).
8. Determining the optimal life insurance policy for you doesn’t have to be complicated. While we could get really granular with a detailed life insurance needs analysis, it’s more important to get set up with something you can comprehend than it is to push off an important decision due to life insurance’s intimidating complexity. In the vast majority of situations, a household would be well cared for simply by buying enough life insurance to replicate all or most of the insured’s income for a term as long as the household expects to need that income.
   
   Therefore, consider this simple but effective strategy for determining how much life insurance your household needs. Multiply a wage earner’s income by 15 and purchase a policy with an equivalent death benefit for a term that extends until the person insured would presumably retire.
   
   Why 15? Because it works. But it works because it results in a number that should recreate 75% of a wage earner’s income if the death benefit was conservatively invested to earn 5% (hopefully plus a bit more for inflation) annually.
   
   Here’s an example: Dave makes $100,000.
   $100,000 x 15 = $1,500,000 of death benefit
   $1,500,000 earning 5% annually produces $75,000 of income.
9. Consider using a live person to help in your death planning. There are many online tools that can help give you an idea of how much money you should pay for the policy you need. But once you get to that point, I would recommend contacting a real, live insurance agent who can walk you through the application and underwriting process. The premiums at a given insurance company are identical whether you apply online, via a toll­free number or with a person. Indeed, a knowledgeable and dedicated insurance broker or agent may help you save money by choosing the best carrier for your particular situation. Underwriting, by the way, is the necessarily tedious process through which the insurance company classifies how much of a risk you are, based on your current health, past health, the health of your parents and siblings and enough other questions to make anyone blush. Answer truthfully—but succinctly.
10. Know your options when cancelling an existing life insurance policy so you don’t leave money, or coverage, on the table. If you have a policy that isn’t appropriate for you—or you simply no longer need it—it’s important to proceed carefully. First, if you realize that you have overpaid for a policy that doesn’t meet your needs, but you still need life insurance, don’t cancel the wrong policy until the right policy is in place. Who knows, you could learn of a health complication that is going to lead to you being declined for the new policy. Then you’d be left without any coverage. If you have an existing term policy you no longer need, you can simply cease premium payments and it will go away. If you have an unnecessary permanent policy with a cash value, however, you should analyze its present and expected future investment value, as well as any prospective tax complications, before cashing it in. You can do so by requesting an “inforce illustration” and a “cost basis report” from your agent.

I suspect we don’t love talking about life insurance because we don’t like talking about death. No shocker there. But open and honest discussions about planning for an unexpected death can be surprisingly life­giving. And even if you don’t buy that, the chances are good that purchasing life insurance is still an important part of your long­term and comprehensive financial plan.

This post is part of an invaluable series pulled together by Forbes: “100 Things You Absolutely Need To Know About Money Before You’re 35.”

This article was obtained from Daily Finance.
Link to Original Article: http://www.dailyfinance.com/on/life­insurance­policies­you­should­cancel
Click Here to Download Original Article in PDF

Life insurance is sold based on one thing: fear. Fear of dying, of being injured. Fear of a catastrophe befalling you or your family. If worrying about death isn’t enough of an inducement, there’s the financial fear of not being able to replace a breadwinner’s salary once they’re gone.

Insurance companies know this, and they use those levers. And they should: Financial peace of mind in the face of loss is exactly what they’re selling.

But some types of life insurance just aren’t worth buying, because the policies aren’t used often and don’t provide much of a return on the premium. You’re better off putting that money aside in an emergency fund for that rainy day, if it ever happens. Here are five life

1. Life Insurance for a Child

Term life policies are meant to replace an income if someone dies. Unless your child is a model or actor and is bringing in a major share of the family’s cash, your offspring doesn’t need life insurance.

Gerber Life Insurance Co. advertises a $10,000 policy for “pennies a day” that could be used to cover funeral expenses. The chances that a baby born in the United States will die in childhood, however, are extremely low.

“Child life insurance policies are sold to parents and grandparents by preying on their emotions,” says Eric Stauffer, president of ExpertInsuranceReviews.com.

If you really want to have coverage in case you need to pay funeral expenses for a child, add a cheap rider to your term policy that would cover them for $10,000 or $15,000, but don’t have them on a separate policy, says Liran Hirschkorn, an independent life insurance agent.

“Most Americans don’t have enough life insurance themselves and should not be buying life insurance on their children,” Hirschkorn says. “This is especially true if you have some savings and have the funds to pay for funeral costs should the worst happen.”

2. Whole Life Insurance

Unlike a term life insurance policy, which only runs for a specified number of years, whole life insurance covers the policyholder’s entire life. The policies are more expensive than term life insurance because the risk is for a person’s whole lifetime. But they also have a cash value, which grows over time, and which the policyholder can use or borrow against. This makes them an investment, though not a generally high performing one. It’s especially not a good deal for young people, says Matt Becker, a financial planner who has written about the subject.

“Life insurance is great when used properly. Whole life insurance is usually just expensive and burdensome,” Becker says.

Stauffer says he had a 28­ year­ old client ask him if he should keep the $10,000 whole life insurance policy his parents have been paying on for his entire life, or take the cash out. They did the math, Stauffer says,

and found that his parents had paid close to the entire death benefit in premiums, but the cash value was only worth $2,000. He cashed it out and invested the money.

3. Industrial Life Insurance

Also called accidental­death insurance, these policies often have low values and cover you in the event of mishaps such as losing an eye or limb at work, or dying in a car wreck or fire at work.

“It all sounds good, but [this type of policy] is riddled with exclusions,’ says lawyer Mark Hankins. “The policy was once sold door­to­door to laborers with weekly payments and known as the ‘Little Giant.’ Its creator boasted on his deathbed he had never paid a claim.”

4. Guaranteed Issue Policies

These are life insurance policies that don’t have any exam requirements ­­ they don’t even make you answer any questions about your health ­­ so they can be quick and easy to get, says Hirschkorn, the insurance agent.

“The issue is that these policies are expensive, and also don’t pay out the full death benefit in the first two years,” he says. “This type of policy should only be considered as a last possible resort for someone with major health issues that can’t get approved for a regular policy, not for anyone else where it would be a waste of money.”

5. Final Expense Insurance

With a typical death benefit of $10,000 to $25,000 for people 65 and older, the policies are meant to cover a funeral and other expenses after someone dies. TV ads promise coverage for a “few dollars a day,” but even at that low price, it isn’t worthwhile, says Justin M. Follmer, a wealth adviser and insurance professional in Charleston, South Carolina, Someone 65 or older can often buy a much larger policy for the same costs, Follmer says.