Category: Life Insurance

So you are in the market to secure life insurance but are hesitant and confused about what to expect. The first step in the life insurance purchase process starts with finding an independent life insurance agent. Why an independent agent? Independent agents do not represent a company but rather are brokers that have access to a wide number of insurance companies and they represent you not the insurance company.

When your interviewing to select your agent here are some key questions to ask:

1. Are you an Independent or Captive Insurance agent?
2. Are you Life and health Licensed?
3. What insurance providers are you appointed with?
4. What types of Life insurance do you recommend? Term, Whole life, Universal Life, Indexed Universal Life.

What’s the difference between an Independent and Captive insurance agent? Lets start with a captive agent’s; they represent an insurance company and can only offer the suite of products the company provides. On the other hand independent agents have access to multiple insurance companies so they can shop around and find the best fit for your individual needs.

Why is it important for your agent to be life and health licensed? With the wide array of riders available some require they agent have a health license such as Long Term Care Riders. Long-term care riders provide a very cost effective coverage to address long term care life events.

Knowing what providers a agent is appointed with can help you research the carrier ratings and help you with the decision on the value of the policy. Will the carrier still be in business when you need them the most?

Life insurance is not a one solution fits all scenario. Having an agent that provides you with choices insures your best interests are at heart. An agent that pushes only one solution only has his commission in mind not the security for your family.

Now that you have selected an agent they will have a conversation with you to help determine what coverage and type of insurance would fulfill your needs. Here is an illustration of the most common method:

There are other methods that can be more in-depth and address your entire financial situation that help establish your future financial goals such as retirement savings, long term care, estate planning to build a long term financial plan. It’s my belief a hybrid of the two is needed to establish a financial foundation.

When your coverage is calculated: ( assumptions: husband wife with two children)

Debt                 $25000

Income             $75000 x 10=$750000

Mortgage         $350000

Education         $50000 x 2= $100000

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Coverage needed $1,225,000.00

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You may think that’s way too much but let me ask you a question; will your dollar have the same buying power in 10 years? 20 years? 30 years? Most likely the answer is “no” this is the time to really understand why coverage is needed and who it protects.

Now that we have the coverage it’s time to take a look at some of the available riders such Return of Premium, accidental death, Child term riders and Long-Term Care to name a few. Of these riders I feel the most important is Long-Term Care because life events such as a heart attack or stroke are now survivable through the advances in medical science. Here is a link to an article we wrote about long-term care solutions you can read it here.

You will need to provide some basic information such as Age, Gender, Weight, Smoker Non-Smoker, Income, Occupation, hobbies such as scuba diving, sky diving and other risky hobbies.   Now that you have filled out your application some providers provide temporary coverage while underwriting reviews your application.

Too get the most affordable rates you will need to take a paramedical examination. The Paramedical examiner will collect a blood and urine sample, record your vitals such as pulse and blood pressure readings and ask a series of health related questions. Underwriting uses this information to help establish the rate for your premium. The bottom line is your health determines the premium. If you have health challenges let you agent know upfront so he can shop around for insurance companies that have favorable rates for your certain health issues.

The most common rate classes are Non tobacco Preferred Plus, Non tobacco Preferred, Non tobacco Standard, Tobacco Preferred, standard tobacco. If you have health challenges the next risk classes are table rated that are as follows Table B through Table P. as you go down in the table ratings your premium will increase and at times drastically.

I have had numerous applicants get better ratings after underwriting reviewed their paramedical examination data reducing their initial premium. On the other hand when applicants try to hide their health challenges they can lower ratings and some even get table rated. Take a hard look at the report from underwriting and review with your agent. At times you can have additional medical tests or request a second review. But in a lot of cases if they give you an approval with health challenges my advice is to accept the coverage because if your carrier table rates you others will also.

Once your approved your agent will schedule a meeting with your to review and deliver your policy. The approval timeline through underwriting varies depending on the information in your medical history and the face value of your policy.

Congrats! Now you have built the first stage of your Financial Foundation. Want more info about building your financial foundation review our article here

Remember as life events happen such as a child being born or buying a new home you should review your life insurance needs with your agent as your coverage may need to be adjusted to cover additional needs.

Cost of Insurance (COI) and how it’s calculated

Many factors come into play when an insurance company determines the Cost of Insurance (COI) for a life insurance premium. When you purchase a life insurance policy your Cost of Insurance (COI) is per $1000.00 of coverage. In this example I will use simple numbers to illustrate the concept.

35 year old male non-smoker
COI = $1.00 per $1000 unit
Coverage $100,000 (100 units)

$1.00 x 100 = $100 annual premium

Your actual premium is calculated using multiple factors such as:

· Age
· Gender
· Smoker vs Non-Smoker
· Health Condition
· Family History
· Hobby Risk factors such a Skydiving, Scuba diving

Each year that passes your cost of insurance increases because age is one of the most critical factors. When you purchase a life insurance policy your premium is average over the term of the policy. Most term policies have maximum duration of 30 years while permanent policies can have a maximum duration up to 120 years of age.

In general term insurance is meant to provide income replacement for a specific time frame in the unlikely life event while your still young. Term Insurance can be a cost effective way to provide coverage on a tight budget. The downside of term insurance is exactly that it’s temporary.

Permanent life insurance is meant to provide income replacement and with available riders provide living benefits for long term care needs and lets not forget with the ability to create cash value. Now the downside of permanent insurance is the increased cost of insurance due to the averaging over the period up to 120 years of age. But is it really more expensive? Let’s take a look at buying 20 year term policies vs a single permanent life insurance policy. For this example I am going to use a 25-year-old male in good health non smoker:

As you can see at 45 the 20-year term expires so he has to reapply for term insurance but now at his present age and health. Can you predict what your health will be in 20 years from now? Let assume he is still in good health and is approved for another 20-year term now at age 70 his second 20 year term expires and wants to reapply for another 20 year term policy, unfortunately a 20 year term is no longer available due to his age.

Now lets take a look at the Indexed Universal Life policy. The starting face value is the same at the start but because I included option 2 or increasing value the face value continues to increase as the policy ages. This example show’s how the Cost of insurance can rapidly increase in the later years and eventually diminish the cash value that has accumulated. It’s my believe the most valuable benefit this policy provides is the long-term care rider. With ability to access your living benefit to help offset the cost’s of long- term care it allows the protection of your assets such as your retirement savings. Health insurance typically only covers a portion of the medical costs associated when you have a major medical event such as a heart attack, stroke of cancer.

When you start the process of securing a life insurance policy things to consider are:

· Will I still have long term debt in 20 to 30 years from now
· Will I be debt free when ready to retire
· Will I be able to self insure myself to take care of final expenses
· Will I be able to have the assets to pay estate taxes
· If I am not self insured will my spouse be able to manage debt’s that are left behind

If you decide to select term life insurance do you have the financial plan in place to enable you to become self insured and debt free. Many retiree’s purchase a home when they down size creating additional long term debt. Life insurance is the foundation of a long term financial plan as it provides the estate needed when life events happen.

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