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Researching Life Insurance

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We dont have accident insurance.I’m 28 and I don’t have any life insurance. For many people, they don’t begin thinking about life insurance until they start a family and I’ll be no different. While we don’t plan on starting a family in another year or so, it’s important to learn things before you need it (before emotion and time pressure begin affecting judgment) and today I spent some time looking at life insurance.

I’m not an insurance professional and everything I wrote in this article is simply my opinion. I understand that I may have made some mistakes or misunderstood some things, so take what I write with a grain of salt. Insurance can sometimes be a confusing topic and I, like many of you, am learning it as I go along. If you do see anything inaccurate, please let me know so I can fix it!

How I Chose Term Life vs. Whole Life

There are four types of life insurance: term life, whole life, universal life, and variable life. My earlier article discusses what each one is. I want insurance to cover the catastrophic problems and I’ll self-insure against the every-day and more routine problems. I also like clear segregation between the various aspects of my life, which is why I want to keep my life insurance simple as well. Some life insurance policies have a death benefit aspect and an investment/annuity aspect.

My goal for life insurance is that I want my family taken care of in the event of my death. Nothing more, nothing less. We currently have one major financial obligation, the mortgage, and while my wife’s income could make the payments, it’s certainly made a bit harder with me gone. If I were to die before we pay off the mortgage, then I want the loss of my income softened with insurance. I’d say my death is pretty catastrophic, right? :)

Since I just want a death benefit and no fancy investment component, my main choice is term life insurance. The main difference is that term life insurance has a set term (number of years between one and thirty) and a set benefit ($X). You pay monthly premiums and should you die before the term is up, your heirs are paid $X. If you don’t die, they don’t get paid.

Why do some experts advise against whole life? Whole life insurance has an investment component and the main reason why people advise against whole life insurance is because you’re often overpaying in fees in that investment component. Whole life isn’t wrong for everyone, but here’s a SmartMoney article comparing term and whole life insurance.

Getting Life Insurance Through Your Job

Many employers offer free term life insurance as part of their benefits package. They offer basic term life insurance and then a supplemental term life insurance. For the basic, they usually pay for a policy that is a multiple of your base pay, so it’s a no brainer to accept that insurance policy (it’s free!).

Then, the supplemental insurance is something you can get if you want additional coverage. The nice thing about the supplemental life insurance coverage is that it’s guaranteed, you don’t need to get a physical to be approved. The not so nice thing is that it’s not subsidized, so you’re paying for it 100%. So, if you have health problems that would prevent you from getting life insurance otherwise, it’s a good thing if you want term life insurance.

Getting Term Life Quotes

So, since I am self-employed and I’m cheap, I don’t offer free term life insurance to myself. :) The next step is to start requesting quotes for $500,000 30-year term life insurance.

The issue of life insurance was first broached when I reviewed and changed our home and auto insurance policies to State Farm. When talking to the agent, I asked for term and universal life insurance quotes for our own edification. There are three insurance “classes” for term life insurance: Standard, Preferred, and Super Preferred. Each insurance company classifies the insured differently and as you move from Standard to Super Preferred, the premiums decrease.

Standard, Preferred, Super Preferred classes: You have to apply for life insurance, submitting yourself to blood work, physicals, etc. The results of those tests are then sent to the insurance company and they determine what class you belong in (if any). The classes differ from company to company. When a broker quotes you a rate, chances are it’s the Preferred rate.

The term life insurance quote for me was $54.83 a month for preferred term life insurance.

We have our starting point.

I turned to NetQuote, a site I first read about on Kiplinger’s, and within minutes had life insurance brokers calling me up with their quotes. What’s funny is that many of those brokers were using the same system, rattling off the same information, but the most informative and least salesy call was from MetLife. He gave me the following quotes (Preferred):

  • TransAmerica: $42.00
  • MetLife: $45.36
  • AIG: $45.50
  • West Coast Life: $45.50

Return of Premium Life Insurance: The MetLife rep also told me about a “return of premium” policy where you would get all of your premiums paid back to you in the event the term expired and you were still breathing. He gave me a quote from Lincoln of $76.13 for the policy (which was the same price as the non-return of premium policy from Lincoln). If I paid $76.13 a month to Lincoln, it would cost me $27,406.80 for thirty years of monthly premiums. Should I see the other side of 58, I would get all of the $27,406.80 back.

While appealing, would I be better served taking the $34 difference in premiums a month ($76 – $42, TransAmerica) and investing it? After 30 years, assuming 8% annual growth and $408 in annual contributions, the investment would yield over $46,200. Cut away 25% for Uncle Sam, and you end up with $34,650, which puts you ahead of the premium life insurance plan and you retain control of your money. (For those interested, the breakeven point is at an annual appreciation of 6.35%)

Update: I had an error in my original calculations, I was subtracting the premiums paid to the regular term life insurance policy twice. The original article erroneously stated that the required rate of return was close to 10% to break even when it fact it’s only 6.35%. My apologies for the confusion! (Thanks Brad!)

Summary

I won’t be getting life insurance just yet but I have learned that it’s important to start the process early because there’s an application process involved. At least with State Farm, there is a medical exam where a nurse would come to me (at no cost) to take blood pressure, urine sample, blood sample, and perform some other medical tests; a fifteen minute process. A telephone interview would also be included to determine past family medical history.

Have you purchased life insurance? If so, what kind and how was the application process?

(Photo: seandreilinger)

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33 Responses to “Researching Life Insurance”

  1. Tim says:

    One small point. If you were able to invest that $34 difference as part of your Roth IRA contribution then wouldn’t your money be growing tax free? One more option to think about which might skew the numbers more in favor of skipping the “return of premium” policy.

  2. Nice post. My wife and I are waiting to get additional life insurance as well. We both have some through our jobs. Mine is equivalent to one full years salary from my most recent year. I’m not sure what the terms of hers are. Once we have kids, of course, we’ll want to have larger amounts of insurance, in an attempt to provide for them…because, well, you never know.

  3. superch665 says:

    I have insurance through my employer, and a supplimental policy 4x salary where I only had to submit to filling out a form. That’s enough to provide for my SO and tween-aged child if anything happened.

    I would be strongly opposed to submitting to any health analysis from an insurance company doctor. Not only quite an invasion of privacy, but it seems like they have incentive to report negatively against the client.

  4. freeby50 says:

    Another good source for term insurance quotes is Quick Quote: https://www.quickquote.com
    They give quotes without requiring your contact info. So you can check prices without having salesmen harass you afterwards.

  5. Jaye says:

    I am a bit of a newbie at this whole “take control of your finances” thing.

    Two years ago I went ahead and got a term life policy through State Farm. At the time I was 24 and the premium is only $17 a month. Did I do the right thing? I have no children, my husband in medical school, and we are renting. The only debt we have is student loans which will be forgiving in case of death.

    I guess I got the insurance at the time because I thought it was a “good deal”. Does that even make sense?

    • Jim says:

      It makes sense in that it’s cheap when you’re 24 and will seem very cheap if you compare it to how much it would cost later on, as for whether it’s a “good deal,” who knows… it’s insurance. If you live past 54, it’s not a good deal but you’re alive. If you don’t, well it’s a good deal and you’re dead… in which case it doesn’t matter. :)

  6. I prefer to gamble in my favor. No life insurance for me. My wife and i decided to put more to paying down debt instead. Then we are adding the additional toward our future. A self-insurance policy in the future might be a good idea but not for us now.

    • M Amer says:

      For 17 to 50 dollars per month. Something is better than nothing. Being cheap sometimes doesn’t pay!

  7. JC says:

    Jim, you gave policy cost info but neglected to mention the policy value. I recently got life through my auto/home insurance (Farmers); had to take the blood test but it was no big deal. I landed in the super preferred bucket so my annual cost is $394 for $1million 15yr term coverage.

  8. My Journey says:

    Jim,

    It should be noted that group term may or may not be portable. So, if you were 15 years deep and you get laid off, you might lose your coverage, and now instead of being 30 you are 45! Run the quotes at 45 vs 30! HUGE Difference.

    • Jim says:

      That’s very true and usually one of there reasons why people recommend against getting insurance linked to your employment. Even if you don’t get laid off and instead want to work somewhere else, it makes the move a little harder.

      • Pete says:

        Even if it is portable, it will more than likely be at a rating of “Standard” or higher. The reason for this is because the insurance was guaranteed issue, the company knows that a percentage of those people accepting the offer to buy additional insurance will be high risk, or be medically unable to qualify for a privately owned policy. These additional costs to the insurance company are absorbed by the healthy clients paying the high premiums.

        Some policies offered on a group basis (through an employer) are portable, but they HAVE to be converted to one of those horrible, nasty, “nobody ever wants it” Cash Value policies.

        Check all of the portability clauses on group insurance before deciding that this is the only insurance you plan on carrying for your family.

        One of the reasons I recommend that people talk with a local INDEPENDENT agent or financial planner about insurance. Aside from being greedy scumbags concerned only with commission, they also know how to calculate needs, and have access to the exact same quotes that are available on the internet (Selectquote, Netquote, etc.). I recommend that the consumer use these resources to have an idea about what a policy will cost before going to see a local agent. Keep in mind that the quotes from the internet are more than likely going to use the best possible rating, so they may seem cheaper, but the agent will ask some underwriting questions that will give him/her a better idea of what rating will actually be issued by the insurance company.

        As far as the Dave Ramsey’s/Susie Orman’s of the world. They have good things to say for the most part, but they are entertainers first and foremost. Anytime some speaks in extremes (never buy whole life) you should take what they are saying with a grain of salt. The same goes for financial advisers that speak in extremes (always buy Whole Life).

  9. Matt says:

    I’ve subjected myself to insurance medical exams twice. Once to get Universal Whole Life insurance (thanks a lot, “financial advisor”) and a second time (when I came to my senses) to get a term policy with better coverage for a lot less. Both exams were non-events. A nurse came by, took a health history, blood pressure, urine, height, weight and blood. In both cases, I was in the lowest risk category. I believe the risk categories are quite prescriptive – typically based on health data (such as cholesterol, HDL/LDL ratio, height, weight, etc) instead of the opinion of a specific doctor.

    My wife and I have two children under 3 years of age, and my wife stays at home. As such, I signed up for as much term coverage as I could (12-14x annual salary is typical max). Being in the super preferred category, I got a $1MM 30-yr term policy for about $55/mo. My strategy was to get as much coverage as I could so my wife would have time to raise the kids and get them off to school before returning to work. Plus, by going with term, we’re saving about $100/mo (which is going into Roth IRAs) compared to the whole life policy we surrendered.

    I do have the option of subsidized coverage through my employer (1x salary is free), and it’s actually very cost-competitive. I decided not to go that route, though, because the cost increases (dramatically) with age, and I’m limited to a max 8x my salary. Cheaper today, much more expensive down the road.

    I’m happy to have the coverage I want at a good price locked-in for 30 years. Did I buy too much insurance? Perhaps. I’d rather have too much than not enough.

  10. thomas says:

    I really like how you broke down the premium insurance policy concept. Getting @10% sounds absurd given the current state of affairs, but it’s not impossible. However, you’d have to operate that personal account and manage the portfolio to accurately reflect your risk.

    Similar to what happened to those recently who didn’t plan for retirement, you could lose all those savings come maturity time. On the other hand, the premium account (I’m assuming) is guaranteed since you didn’t die.

  11. That One Caveman says:

    We recently got life insurance and I’m happy we did. I feel more comfortable now that I know my family will be taken care of.

    As I generally recommend (in a non-professional, disclaimer-ridden way), get enough Whole Life to cover the “fixed” end-of-life expenses such as the funeral and get Term Life to cover what your heirs will need for that period of their life. What your family will need over 30 years is different if you’re starting the clock at 28 vs 38.

  12. MIke says:

    Good article. I think the best advice overall would be to find a good agent though. Depending on your health, a good agent should be able to tell you which company will give you the best deal. Yes, I know we all think we are in “perfect” health but it’s just not the case. I’m an agent and every day I see people who are 15 pounds – 20 pounds overweight and have other small issues and they get knocked out of the best rate. Had they gone with another company who probably didn’t show up on that fancy spreadsheet they would have gotten a preferred or better rate. It doesn’t always happen but it does pretty often.

    One last note from an agent to people who are shopping around.. Stop laboring over a few dollars a month difference between company x and y get get insurance already. The whole point is that you don’t know when you are going to die and if you do, it will be a huge burden on your family. Stop screwing around and buy the insurance…. You can always spend time shopping, comparing, analyzing and get a different policy later. If you aren’t covered now though you are leaving your family exposed.

  13. mbhunter says:

    Term is smart. I agree.

  14. eric says:

    Nice post. Keep us updated whenever you decide to go through the application process and such.

  15. The thing people need to understand about insurance is that the best time to buy it is today. Why? Everyday it gets more expensive as you age increases and your health decreases. Unlike the cost of computering power which comes down every 18 months thanks to Moore’s Law- insurance does the opposite every six months– it goes up!

  16. Steve says:

    I had term life for 4 years, then I recently converted to whole life. It’s nice to know that I could use that investment money later on down the line as collateral and my premiums are fixed for life. It’s a small plan of $150k and I think it’s a good start. I like the idea of whole life insurance. If I saved $XX on my monthly premium by having term, could I invest the rest (like many people say)? Sure I ‘could’ but I won’t… just like most people. This thought did come to mind though when I converted to whole life, so I immediately setup an automatic savings plan with Capital One Direct while it was fresh on my mind.

  17. labelcd6 says:

    Nice article. I’m pretty much in that same boat that you are as far as not needing life insurance at the moment. I’m 99.9% sure that I’ll be getting $500,000, 30 year, term life insurance when the time comes.

  18. TJ Shah says:

    Jim,

    I tend to disagree with your quotes “While appealing, would I be better served taking the $34 difference in premiums a month ($76 – $42, TransAmerica) and investing it? After 30 years, assuming 8% annual growth and $408 in annual contributions, the investment would yield over $46,200. Cut away 25% for Uncle Sam, and you end up with $34,650, which puts you ahead of the premium life insurance plan and you retain control of your money.”

    Although theoretically if your investment earns 8% annual growth you would come out ahead but you can also make losses with your investment and not see the money at all. wouldn’t ROP policies a better safe investement. Besides where do you get a guaranteed 8% returns these days. I would like to know if there is such an investment.

    TJ Shah

    • Jim says:

      Yes you can lose money in your investments and that would make ROP policies a better safe investment. There aren’t any guaranteed 8% returns and it seems unlikely there will be in the near future, unless we start seeing runaway inflation, in which case 8% won’t be that great anyway.

      But you need to know these numbers so you can make decisions. I don’t think 8% annualized growth over 30 years is unreasonable, especially when you believe the market is in a depressed state right now. If the numbers said you needed 20% annualized growth over 30 years to breakeven, then you know clearly what the right answer is. 8% isn’t outlandish, but 20% probably is.

  19. ian says:

    DDFD said: “The best time to buy is today”

    I don’t need the benefits of life insurance coverage for several years (read ~5). Does it make sense to pay for it now anyway?
    What do you do when the policy ends earlier (because you bought early) and you are still alive, do you purchase again at an even higher rate?

    I am in the same boat as Jim (28, married, no kids) and not planning on buying life insurance yet. Does it make any sense at all to wait? Converting this to a math problem: The cost over the next 5 years of insurance i don’t need (~$3k) vs. the additional cost if i buy a policy 5 years from now ($??)

  20. We see eye to eye on term vs. other forms. My wife was concerned about the fact that term lapses after a period. I pointed out that it is intended as income replacement, and that our policy (50 year term) would lapse around age 80. I really hope that I’m not working very hard at that age.

    If I were you, I’d bite the bullet and get the insurance NOW intead of waiting a year or two. You might get hit by a bus next week.

    The medical part really isn’t that bad. We have Northwestern Mutual, and they send a nurse to your house at a time that is convenient to you. Even nights and weekends. Blood draw, urine sample, blood pressure, and a chat about family medical history.

    I’d also recommend periodically reviewing the amount of coverage as your life changes.

  21. Jim, great post.
    If you qualify look at USAA, they have great service and prices.

    We used Accuquote for my hubby since USAA seemed pricey.We saved $20/month that way.

    You can usually save by having it auto deducted from a checking account or credit card (good way to keep your credit card active).

    You should consider buying before you are 30 even if the kiddos haven’t arrived yet, your cost goes up at age 30.

  22. @Ian

    Not geared entirely to you, I have read others saying the same thing.

    Two things to consider:

    1) You mention that you don’t “need” life insurance– you’re right you don’t need it– your family does. If you didn’t come home alive tonight– could your family use say $250,000 tax free if you aren’t alive?

    2) Are you a gambling man? You are assuming that you will remain insurable a few years from now? What if you are not insurable in a few years?

  23. Todd says:

    Just a quick comment on life insurance: look into fraternal insurance organizations like the Knights of Columbus, Modern Woodmen of America, etc. Some have membership requirements (“be a Catholic in good standing” for KOC) or are open to the general publi.

    Often these are rated at the top of the industry, rates are good, and returns are a bit higher. They tend to be more conservative in outlook, and don’t offer a lot of gimmicky products.

    They are like the “credit unions” of the life insurance industry. They are only accountable to their memberships, not outside investors.

    Dividends that they offer can be used to pay down premiums, often after just a couple of years. One upside of more expensive “whole life” style policies with fraternal insurance companies is that the dividends soon outweight the premiums, and can shift your insurance cost to $0 for a growing asset.

  24. Melissa says:

    I have a question – say the term life policy is $30.00 a month. Do most companies have you pay monthly, or just pay one large sum at the beginning of the year?

    • Shock says:

      Yes, you can pay annually. It’s the cheapest way to pay. I pay annually for my 30 term life insurance. Paying quarterly or monthly costs more at the end of the year. I’m like Jim, I didn’t need life insurance when I was single because no one is counting on my income if I die. Now that I’m married and have a kid on the way, It was time for life insurance. My financial advisor found the best coverage for the money. We had the medical exams at our home on our schedule. The process was painless (pun intended).

  25. Melissa says:

    Thanks, Shock!


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