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Tuesday, May 04, 2010

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.

35 comments:

Mike said...

I got an ROP 30 yr term plan. While it costs more than a standard 30 yr term, I would have to generate 13% annual returns with the money I would have saved with a standard policy versus my ROP policy. Other than investing with Madoff, I don't many ways to generate consistent 13% returns, so I bought my ROP policy and look forward to getting back all my premiums in 29 yrs G-d Willing. BTW, to the extent it is helpful, my ROP 30 yr policy has a death value of $1 million and costs me $970 a year.

Shoshana Z. said...

Mike, what company is this with? My husband and I have term insurance - him $750K, me $450K. But we are paying appx. $1500 per year. This is with Northwestern Mutual. I had no idea that we were overpaying by so much. If anyone can recommend which companies they use I would appreciate it.

Lion of Zion said...

we bought term policies about a year ago. the ROP didn't seem to make sense for us (i don't remember the specifics). on the other hand, we have the option to convert to a new policy after 30 years without being denied. (the broker made a big deal about this, but i don't know if it's really worth it. the conversion rates at 30 years are not guaranteed and they can charge as much as they want to effectively deny you the conversion option.)

Mike said...

SZ,

I got my policy from Transamerica via "Lifeinsure.com". Note that I got the policy when I was 27 yrs old and B'H qualified for the absolute highest health bracket. Also, While I was applying for the policy, Transamerica raised their ROP premium rates but luckily I was able to qualify for their old rates since my file already was in underwriting at that point. Anyhow, it seems like you are paying a bit much but w/o knowing your age and health I can't say so for sure.

JLan said...

A couple of follow up questions:

1) You seem to be recommending for couples to get insurance as soon as possible; would this include times prior to them having children? (Especially if they're being fiscally responsible and saving for a few years, first).

2) Is there a way to quantify currently unused perks from work, in terms of earnings? I know that insurance companies are generally leery of providing insurance to what they consider rediculous levels (as it would induce moral hazard issues). To be more specific, here's my concern:

1) Wife and I currently have no children (we're thinking we'd like to have 3-4, but that could obviously change)

2) We're not sure if we're going to end up staying in the NY area or not, which obviously would have a significant effect on expenses, especially tuition.

3) I'm currently a teacher at a day school. Said day school offers teachers a 50% tuition break; additionally, teachers can deduct tuition from their paychecks (via a "cafeteria plan"; this is not the legally questionable "QTR" system), resulting in a significant additional savings. Now, at this point, that's obviously worth $0. If, on the other hand, we had 4 kids, and then I passed away, that benefit could easily have a value of a million dollars or so (at slightly higher than today's tuition levels).

That being the case, is there any actual way to deal with such scenarios? Or are such things typically left out of planning, or, for that matter, is insurance then best put off at least until we have kids?

dvorak613 said...

To add to JS' question: Does it make sense to buy life insurance when there are no children yet AND the couple is still in school with no income or a small income from temporary part-time jobs?

My husband and I were in this situation when we first married and were advised to wait either until baby or graduation+job. Baby came first (well, actually, graduation did, but we both went straight to grad for me and law for him, so no jobs till that's done). We're insured now, but seeing this post, I'm wondering if we were given good advice to begin with?

dvorak613 said...

Sorry, I meant JLan's question.

Zach Kessin said...

I don't get how the idea that faith means that we assume nothing bad ever happens? Have people just not been paying attention? I mean EVERYONE dies at some point. Obviously I want to live to 120 (and with my genes that may actually happen) but I could get hit by a bus on my way to work tomorrow. It pretty rare for that to happen, which is why term life insurance is so cheap but it does happen.

Maybe its just the meme of "Well of course nothing bad will ever happen to me" that annoys me.

(right now I'm weathering a bit of a crisis, and so far at least holding my head up with it)

tesyaa said...

As a life insurance professional I will point out an anomaly in term insurance rates (especially for you young people wondering whether to buy insurance right now or to wait): sometimes you will see rates that are actually higher at ages 18-24 than ages 25-30. It depends on the company and the particular plan. But it can't hurt to compare rates and gather as much information as you can.

Anonymous said...

Excellent post. This should be required reading in all high schools, colleges, and be read again before signing the ketuba and upon discharge from the maternity ward. This is coming from someone who now has to pay $4,000/year at age 50 for $750,000 for term coverage that ends at age 65 with premiums increasing with age because I didn't know enough to buy a policy in my 20's or 30's.

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Very Old Frum Actuary said...

And if any of you received the AREIVIM mailing, please ignore it. Pay no attention to the signatures of various organizations and Rabbonim who signed it. It is NOT a replacement for Life Insurance, and has little mathematical chance of success. I would love to write a post on why it won't work (no, you do not have to be an actuary like me to understand why. My son's Rosh Yeshiva asked my opinion and understood the problem) but how can I send it in?

Orthonomics said...

Actuary-Please submit a guest post for me and I can see if other bloggers will also cross post.

I touched upon this unsound plan here:
http://orthonomics.blogspot.com/2009/12/oops-model-is-no-longer-working-very.html

I'm happy to host a post as soon as you are able.

Anonymous said...

Me and my wife both bought $1m each of coverage for 20 year term. We pay $1400 a year, in quarterly payments. We bought it before we had our first kid. It it wrong to them if we don't have it, if god forbid something went wrong.

A Young Life Insurance Actuary said...

I would like to add a few comments. You have reposted something that is a bit dated.

1. ROP is probably no longer worthwhile. It is a product from back when companies were optimistic about long term interest rates. With current pessimistic interest rate outlooks, the extra cost over regular term rates makes it not a good deal.

2. As someone pointed out, mortality rates dip at young ages before they start heading up permanently. That means that if you are 24 or under it might be cheaper to wait to buy life insurance if you can afford to wait (i.e. no dependents with needs). However, some companies smooth the rates so that a 20 year old will pay the same as, and not less than, a 26 year old.

3. In addition to "banking proceeds at interest" there are also settlement options, i.e. payout annuities, i.e. income for life. This may be a good idea for some people to consider.

4. Using proceeds to pay off your mortgage decreases your potential future income. It may not be the best choice. It is best to have a competent fee-for-service advisor help you figure these things out if you ch'v do collect on a policy. Fee for service means that there is no moral hazard affecting the advice.

5. Permanent policies are indeed about combining protection with savings. However, there is also the more obvious component - the fact that it is permanent. You may have need for life insurance well past your 50s, and if you buy in your 20s no level term policy will go that far (the longest competitive term product is 30 years, and it is overpriced as it is). However, there is a better solution - UL with secondary guarantee. This can function as a level term policy for any number of years. It will come out to be slightly more expensive than ordinary level term of the same duration, but it can't be compared to level term if you are planning for 35 or more years of coverage. In Canada there is Level Term to 100 (T100), but it is not sold in the US. UL with Secondary Guarantee is sold in the US and provides the buyer with the same coverage as T100. And the price is a fraction of a traditional permanent policy.

6. Hardly anyone will advise buying VUL these days.

I have extensive experience in pricing and designing all types of life insurance products, and I frequently offer to advise people who are looking into life insurance. An agent always has underpinning motives for recommending a certain product, so you should always do your own due diligence research. My advice is unbiased because I am not legally allowed to sell or profit from the sale of life insurance due to a conflict of interest. If anyone has any specific questions I will happily answer them. My email address is drmiddos@gmail.com

Anonymous said...

I loved the idea of paying for the first year of premiums as a wedding present. I've never heard of that before. It would also be a good group gift for a baby shower. I think you need to pay the premium, not buy the policy since the insured has to fill out and sign the application, but you could make and wrap a nice "gift certificate" together with an offer to set up an appointment with an agent. Along those some lines, another great gift would be to pay for X hours of a financial planner's time to go over the basics and set up some goals/strategies for the couple as they start out. Gifts like these may be best made by grandparents, parents, or aunts and uncles. Either of these gifts may not be well-appreciated and might even be resented initially, but they won't be forgotten or end up collecting dust like so many other gifts and will be well-appreciated many years later.

Anonymous said...

Young DrMiddos - actually, ROP is unattractive today because of changes in the life insurance regulation, AG-45. This was all in motion before interest rates tanked - thanks to the Utah insurance commissioner. Right? I'm sure you knew that.

Mike said...

I don't understand. I got an insane rate on an ROP premium. I would have to earn 13% a year on the extra money I could have saved versus term. Why you bashing it here?

Anonymous said...

Mike,

When did you get your ROP policy? I'm guessing not recently. It used to be a better deal than it is now.

Anonymous said...

Anonymous 8:45pm,

The unattractiveness of ROP prices started almost 10 years ago, well before AG45 was proposed. And AG45 only kicked in at the start of this year - compliance was not compulsory before 1/1/10.

Even before AG45 most states required some NF provisions on ROP. It is only a difference of degree.

UT (and PA) simply did not approve ROP sales without AG45 compliance. But ROP did exist in other states that did not require such stringent CVs.

The major change in price before this year was due to interest rates, not AG45. However, any policies that are AG45 compliant (sold this year) are at an even higher cost now.

Margaret said...

My husband (24) and I (21) are childless newlyweds. I have no insurance on him, I have a $50,000 life insurance benefit through work. Even if my job didn't provide insurance, I'd still get some, because right now, I have more "value" in the marriage than my husband does. I'm a US citizen, and he is emigrating based on our marriage. Should I die, he is technically till entitled to immigrate because out marriage was made in good faith. The insurance on me is to cover the lawyer's expenses for seeing him through to citizenship in the event of my death. We will probably take out a policy on him later this summer, once he turns 25 and the rates drop.

Dave said...

Note that under current US Law, if the marriage is less than two years old, the surviving non-citizen spouse is not eligible for citizenship, and will instead be deported.

Margaret said...

Yes. If I die in the next 19 months, he's in serious trouble.

Abacaxi Mamao said...

If I am 30, single, childless, and debt-free, there is no reason for me to have life insurance, right?

Dave said...

Do you expect any of that to change in the next 20 or 30 years?

If so, now would be a good time to get term life insurance, when the rates will be relatively low.

Abacaxi Mamao said...

Dave, I really hope that everything but the debt-free part changes sometime in the next 20-30 years! (Although I don't suppose I would mind being 30 for a good long while.) At what age do rates jump? And how would I have any idea how much to insure myself for?

Lion of Zion said...

ABACAXI:

it's not just about doing it before there is an age-related price increase. by waiting you are gambling that
a) rates won't go up over time faster than inflation or your income (and supposedly term rate are very low now?)
b) your health doesn't deteriorate

but of course it's a gamble, so perhaps as time goes on insurance companies will drop rates and your health with improve and then you can get an even cheaper policy

Lion of Zion said...

ABACAXI:

and if course right now insurance companies might charge more for people over 35 (for example), so you figure you wait till 34. but then suddenly they adjust for that increase to kick in at age 31.

again, a gamble (but i guess someone knowledgable in the field can tell you if historically the companies have adjusted this)

tesyaa said...

Sometimes you are better off buying at a pivotal age, e.g. 35 or 45, where the companies attempt to compete aggressively on price, since brokers compare those ages carefully. But make sure that you are 35 or 45 according to the insurer's calculation, not your chronological age. Most insurers use an age nearest birthday methodology, which means that if you are 35 years 6 months and 1 day old, you qualify as age 36. A few companies - not many - use an age last birthday methodology, which is, like it sounds, the age you turned on your last birthday. You can even use this to your advantage by buying from one of the Age Last Birthday companies. But term rates among the most competitive companies are very closely bunched, so you might literally be saving half a dollar a month by shopping around so closely.

Young LI Actuary said...

Since State law requires smoothness of rates, you're not going to see big jumps in rates year-over-year anymore. Beginning at age 25 or so, mortality rates increase steadily every year. Juveniles and early 20s rates are an exception because actual industry mortality shows ups and downs. It is a good idea to keep in mind that your insurability might decline over the years and it is better to get coverage while you can.

Fierce competitiveness in term insurance is the reason why rates are as low as they are. Unless insurance companies start going bust that competitiveness isn't going away (and insurance companies are not going bust). The variables are reinsurance availability and price (which will hopefully improve), long term mortality (trend is improvement), and long term interest rate forecasts (persistently higher rates will mean lower prices, but don't hold your breath).

Michaela said...

Important life insurance information:
Women should not apply for any life insurance policy which requires a medical exam while pregnant or for several months after giving birth. A pregnant or nursing mother's lab results will cause all sorts of warning bells to go off in the head of the underwriter, and it is highly likely that she will be rejected for the policy or that she will be rated up because of the lab results. The underwriters are not doctors, and certain perfectly normal results for a pregnant woman such high cholesterol will keep women from getting the best policy.

I applied for a million dollar policy soon after my child was born. My cholestrol, which was usually in the 200 range, was over 350. The company gave me a terrible rate because of my cholestrol. I spoke to my doctor, and she sent a letter to the underwriter. I sent scientific studies to the underwriter. Nothing worked to convince that underwriter or the underwriters at two other companies that they should ignore the lab results because I had recently given birth. The only thing that would change their minds was new lab results with better cholestrol numbers. Since my cholestrol was still high from the pregnancy, I accepted the (much more expensive) policy they offered me. A year and a half later, I applied for a new policy. My cholestrol was 179. I got the best rate for someone my age. But...because I was a year and a half older, I am paying more than I would have if I had been approved for the orginal policy (and more than I would have if I had waited six months after giving birth to apply for a life insurance policy.)

Lion of Zion said...

MICHAELA:

we were concerned about this also, as my wife was pregnant. the agent said not to worry. indeed, she still got the best rate.

Michaela said...

Lion of Zion:

I should have had your agent! Mine was a terrible advocate for me.

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