Back by Popular Demand

Numerous posters have asked me to make a post on life insurance. I can't stress the importance of adequate insurance coverage. Life happens and, while life insurance cannot heal the emotional scars of the death of a loved one, it can provide a safety net that will ease the transition and allow the widow/widower to take a step back and not act rashly. I'm reposting my first post on Life Insurance as well as an overview of the basics from a reader and commentor. See below.

Repost of my first post on Life Insurance:

It is always fascinating to see where the discussions contained in the comments section of each post go. The comments from this post, at one point, turned towards a discussion of just how important life insurance is. On top of the pure tragedy of loosing a beloved spouse and parent, are the financial devastation that follows. Bills continue to pile up, and often the other parent is forced into the workforce prematurely and, even then, it is often unlikely that he (or she) will be capable of making up for the lost income.

I can't stress enough how important life insurance is, and not just for the primary breadwinner, but also for a homemaker, whose contributions must also be replaced. And, even a secondary breadwinner should not assume that he or she does need life insurance because that income may not replace the expenses that the family has assumed over the years. For example, a family with an average salaried teacher and a high salaried executive has probably incurred expenses and obligations that cannot be covered by a teacher's salary alone.

The subject of life insurance certainly isn't pleasant to discuss, but with a little practice, the discomfort wanes and the discussion becomes just another routine topic. But, be warned, chances are that if you haven't taken out life insurance and want to discuss the necessity of doing so, the ice will be a bit tough to break in the beginning.

Unfortunately, I know some people that are sorely mistaken in their views regarding both life insurance and health insurance and believe that taking out these policies demonstrates a lack of bitachon. Fortunately, the proper approach as delineated by our gedolim falls on the side of common sense. For more information on the Torah approach, see articles by Dr. Yitzchak Levine and Jonathan Rosenblum that appeared in the Jewish Observer and Mishpacha, respectively.

Fortunately, life insurance is not nearly as expensive as you may have imagined. We pay around $550 a year for combined policies of over $1,000,000. [Since this post we've increased our coverage to a greater amount]. In the case of the death of my husband (chas v'shalom), the money provided would pay off our mortgage, continue to provide a cash flow stream to cover our expenses, and pay for the college education of our children.

In the case of my own death (chas v'shalom), the money provided would pay for all additional expenses that would need to be incurred should we loose my (most valuable) services. Although I believe that my services are worth much more than they would cost on the free market, the point remains, nevertheless, that the services of a homemaker have value and would need to be replaced at some level. Child care, cooking, cleaning, running errands, shopping, etc. have value. So do the administrative and financial services provided by many "modern" homemakers.

In regards to the cash flow stream, one should know that your agent can and will include expenses well beyond "the basics" and ensure that it covers Yeshiva or Day School tuition also. It is a wonder that the admission applications for Yeshivot and Day Schools do not REQUIRE the parents to prove that they are carrying sufficient life insurance to cover these costs in the case of a tragedy, chas v'shalom.The cost of life insurance is certainly a difficult cost to manage if you are paycheck to paycheck. But, this cost is so important that one should find a way to include it in the budget. Having life insurance gives parents choices that they might not otherwise have in the case of a tragedy, choices that could be necessary not just for the financial health, but for the mental health of the surviving family. Choices that allow parents to ease into a new life without completely upsetting an already upset home and family.

Dr. Levine suggests that buying couples their first year of life insurance as a wedding gift. I definitely think that it should be a priority of the community and of parents to make sure that all married couples (especially their own children) are educated about the basics and the importance of life insurance.While I might not have the courage to offer life insurance as a gift to the next chatan and kallah, I admire those who do. Maybe, at the very least, I can muster up the courage to mention the importance of life insurance to young couples I know that are having their first child (or second, or third. . . ). I certainly would not have minded if someone had broached the subject, because until recently, we were not carrying nearly enough life insurance. [Note: this is an old post. We now have plenty of insurance!]


Guest Post on Life Insurance Basics (thank you once again):

There are two types of life insurance – permanent and term. Permanent, as its name implies, provides coverage until you die, as long as you don’t lapse the policy. Term offers coverage for a specified time period. Permanent insurance generally has a cash value that belongs to you even if you lapse the policy, while term provides pure insurance coverage with (usually) no cash value.

A few quick words about permanent insurance. Types of this insurance are Whole Life, Universal Life, and Variable Universal Life. These are basically complicated investment vehicles in addition to providing life insurance. Investment return accumulates tax free until cash value is withdrawn. Most people are better off keeping their insurance and investment needs separate, since permanent insurance doesn’t offer the most competitive investment returns. Certain very high net worth individuals or couples who have insurance needs may benefit from these policies for estate planning purposes. If this is you, you and your financial advisor know who you are.

This discussion will focus on term, which, thanks to competition within the industry, has become quite economical. I’m not going to show sample rates because they vary by age, sex, whether or not you smoke, and your health, but several hundred dollars a year of outlay can buy several hundred thousand dollars of coverage, or much much more.The type of term you can buy today is generally what’s known as level term. Level term lets you buy a fixed amount of coverage for a period, such as 10, 15, or 20 years, paying the same premium each year. The price is calculated to be level even though the cost of insuring you goes up each year (after all, you’re getting older and you might be getting sicker). The flexibility to buy term insurance for periods as short as 5 years or up to 30 years, depending on your personal needs, is one of the great things about level term.

As I said, there is a great deal of competitiveness in the industry and there is not a lot of price difference among the cheapest 10 companies, so don’t feel you have to shop for the absolute lowest rate. You can buy through an independent agent, which means that he/she is not representing any one company and can search for the policy that’s best for you. I don’t recommend buying life from the same company that sells you homeowners’ or car insurance, though it might be convenient. Many times a property insurer will offer a couple of life products just for this reason, but they are not life specialists and therefore don’t have the most competitive rates.

Your agent should also consider the claims paying ability of the company you are choosing. Ratings from A.M. Best and Standard & Poor’s are available at sites like insure.com. In addition to the big names in the insurance business (MetLife, Northwestern Mutual, AIG, ING), here are some companies which may not be household names that are very competitively priced: Banner Life, West Coast Life, Genworth.How much term life insurance do you need? The rule of thumb is 10 times income. For example, if your income is $100,000, you need $1 million in coverage. Consider your family size and tuition costs. There is such a thing as mortgage insurance, which is not worth buying as a separate coverage. Make sure your main policy is enough to cover paying off your mortgage. Even a stay at home parent should have life insurance, because of childcare and other household help that would be needed in the event of a claim.

Not surprisingly, your health will determine how much you pay. Companies offer super low rates to people who are in very good health. Depending on the amount of insurance you buy, you will be underwritten based on your health. (Very small policies aren’t underwritten to a great degree). There can be blood tests and a medical or paramedical exam, and a health history and usually a family history will be taken. If you think you have health issues, discuss with the agent, since some companies underwrite more or less leniently and a knowledgeable agent can take this into account when recommending a policy.

Here are some health issues that you might not realize are big considerations. Have you been diagnosed with depression? Do you have high cholesterol? Even if these problems are controlled with medication, they will count against you, although you may still be able to buy an affordable policy, especially at younger ages. Obesity will also count. These are in addition to obvious sicknesses such as heart problems, history of cancer, etc.

Therefore, it’s good to buy a policy when you’re still young and healthy.

By the way, it’s not a good idea to every lie on an application, even if you think you can get away with it. Besides the fact that it’s totally wrong, if you do ch”v have a claim, especially in the first 2 years (a legal period known as the “contestable period”), your application will be scrutinized.

There is a difference between fraud (actually trying to defraud an insurer) and misrepresentation (knowingly or accidentally fudging the facts). These are actually complicated legal terms, but either way, if you lie you will either get caught before the policy is issued or if there is a claim, it may face legal challenges.Insurance is one of the few things we buy hoping never to use it, but there are unfortunate events, and claims happen every day. If you have a claim, your insurance company will probably offer to put the proceeds in an interest bearing account for you. This is worth considering, even though common sense says that the company is doing this so that they can continue to make money. People don’t usually think straight after experiencing something traumatic like the loss of a spouse, and you may be tempted to use the money unwisely. Tie the money up in an interest bearing account (if you don’t want to leave it with the insurer, you can shop around for a good rate, but something tells me this is not what someone wants to do when they’ve just had a loss), leaving an amount available for living expenses, and at some point get financial advice on how best to use the proceeds to meet your future obligations.

Let’s say you live to the end of the level term period – now what? If you have timed your policy to expire when your dependents no longer need the death benefit – good for you, that is what you should have done. But what if, for example, you had a baby unexpectedly later in life? When the term period runs out, you will probably still be eligible for coverage, but your rates will skyrocket, and go up each year thereafter. If you are still healthy and young enough you may be able to buy a new policy on the open market. If not – let’s say you have health problems that make you uninsurable – you may find it worthwhile to keep the original term policy even at the super high rates. Some policies allow you to convert to a permanent insurance policy from a term policy without further underwriting. It’s more expensive than term, but this may be the way to go if your health does not allow you to buy a new policy.

There is a fairly new type of insurance out there called Return of Premium Term (ROP Term). This pays you back all your premiums if you live to the end of the level period. It’s more expensive than regular term insurance. It appeals to people who feel that they have to get something for their money no matter what. It’s a psychological need some people have. If this is you, you might consider it.