10 Apr Insurance Talk — Understanding the Nuances of Life Insurance Part 2
Rex and Cheri have the answers. Listen here.
Insurance Talk — Understanding The Nuances of Life Insurance Part 2
Cheri Martinen – We are here to help you with all of your insurance needs but today we are talking about life insurance. Last week we talked about term insurance, how much life insurance you might need, and then we talked about the bell curve of how much you need throughout your life.
Term Life Insurance
Rex Lesueur – You need a lot more when you’re young and have lots of responsibilities and as you get old, you don’t need as much.
CM – And maybe when you’re older you’re looking for what we call ‘final expense,’ which is different from life insurance.
RL – Yes. Well, it’s still life insurance, it’s still a thing where people give you money after you pass away. But it’s for a different purpose. We had kind of gone over term insurance a little bit. I’m talking about a policy that is less expensive than the least expensive kind of insurance. And the reason it’s the least expensive is that the insurance companies know that only a percentage of the people that are going to buy this policy are going to die while it’s in force.
CM – And most of the time it’s for a chunk or period of time, which is like the term of the insurance.
RL – Yes. And most of these policies are written for people from their 20s through their 70s. You don’t get very many term insurance policies into the 80s.
CM – They know the likelihood of you turning in a claim go higher.
RL – Go a lot higher. Then there’s the part of the insurance world where we talk about planning for your ultimate demise. Really specifically wanting to have insurance available when you die for any number of reasons. The two most important reasons are final expense, take care of the funeral expense, any medical issues that need to be taken care of. Maybe by setting up a small nest egg for the family or what have you. But that’s the primary one for final expense.
Final Expense Insurance
The other one, and we’re not going to go into it real deep, I don’t even want to talk about it too much, is there are some very specific and very useful ways to use life insurance for estate planning. This typically only happens when someone has a lot of money. There’s something called ‘estate taxes’ out there. And right now I think the threshold is like $11 million for federal and I think it’s $3 million for state. So basically what that is, that’s a death tax. And we have death insurance, we have death taxes. So when you die, the state of Oregon or the federal government says, well, if you have this much money when you die, well because you died, we now want a certain percentage of that.
CM – And those funds are maybe transferring to another individual depending on how you planned your estate.
RL – Right. Well, but the thing is if you have this much money in this many assets, they’re going to say, you’re worth $20 million, we want $10 million of it. Okay. Now that’s a real problem for some people. It’s especially if that $20 million they might have is a farm or businesses or property and it’s not like they can liquidate that, the family can liquidate that money instantly at good terms in order to pay those taxes. And there are very, very positive uses of life insurance where people can buy life insurance for the purpose of paying those taxes, so that there’s cash available so that the family enterprise, the assets that have made this person successful and rich in their lives can continue on and be passed on to the next generation. So that’s one of the purposes of it.
Whole Life Insurance
There are two kinds, and we’re going to call these ‘permanent insurance.’ One is called ‘universal life’ and the other one’s called ‘whole life.’ Whole life is what they started selling 200 years ago, door-to-door back in the day. Literally there were companies like Prudential and Metropolitan Life actually made their bones in the world by having crews of people going around selling $500 policies, $1,000 policies for 50 cents a week. And they would actually have the guy come by and collect the money once a week. They were called ‘debit agents’ and that’s how the world got started.
These were straight life insurance policies. You paid on that policy until you died. And some of them had what they’d call a ‘savings factor’ to them where there was money that would save up. But most of these policies were so small, and they were dealing with, in a different era, when $1,000 was a lot of money to a lot of people. And the reason that debit agents would show up every month was so they could sell another policy. Another kind, another policy, all of this stuff that they would do and so on. So those policies are gone.
We still sell occasional whole life policies. They are very useful for straight up, if we’re looking at someone who’s already in their 70s, we will sometimes use that kind of policy. They’re more expensive, but they do have a savings factor to them, and that’s a useful policy.
Universal Life Insurance
The second kind is a universal life policy, which is a policy that definitely has a savings component to it. You put enough money into the policy so that it will continue on for as long as you live. Now this is all based on actuarial science and the cost of the insurance goes up in the plan every year. And so you have to have enough, you put enough money into the early part of the policy so that when we get to the end of the policy, when the insurance is really expensive, there’s enough money to pay the premium without you actually having to get into your pocket for it.
It’s kind of like a term policy that keeps going up every year, but in order to make sure that you can continue to pay for this term policy, because when you start getting out into your 80s and 90s, term insurance is really expensive. You have to put enough money into the policy in the beginning part of the term, beginning part of the year, or the years. And then that money accumulates and so on.
Now the money accumulates interest. You can also put it in the stock market. There are any number of different processes where you can invest your money so that that money can grow to make sure that the money is there for your life insurance when you ultimately pass away. This is a really complicated thing. I’m not going to try to get too deep into it. If you’re interested, give us a call and we can talk about how that would work.
One of the things I wanted to switch gears on here is talking about another kind of life insurance that a lot of people get surprised about. And if you have a post office box or you get mail, someone’s sending you probably once a week an offer to buy some insurance. It’s going to be through AAA or it’s going to be through someone else, and they’re all good products. I’m not picking on any of them. I shouldn’t name any names and I’m not going to. But there are some times people will sell these accident policies.
CM – And what’s the difference between an accident and a life insurance policy? RL – And like $2 a week, you know $1 million worth of accident insurance. Well, these are policies that only pay if you have an accident and 95% of the people pass away from biological reasons. Very few people have accidents and die, regardless of what you might think.
CM – Regardless of what the paper and the internet says. Most of us die in beds.
RL – Yes we do, from biological causes, so you need to be really careful about that. What you’re buying when you’re looking at these. If you have any questions, find a financial consultant or a life insurance person to give you some advice on it. Matter of fact, life insurance is too complicated to do at home. Find somebody to talk to and ask them and have them give you the skinny on all of it.
Additional Life Insurance Products
Another product that you see on TV a lot is the final expense ones that are specifically geared towards seniors. Those actually can be very useful. If you’re in a situation where someone is in their 70s or 80s and they’re maybe not in good health, most of the time those policies are still available. They say ‘no underwriting.” Underwriting is where the insurance company if you’re 30 and you want to buy $1 million worth of life insurance, the insurance company is going to come out to your house, they’re going to weigh you.
CM – And the idea behind this is that actuarial science again. So if you are very, very healthy, you pay less for that term or whole life insurance. Whereas if maybe if you have a chronic disease or something like that, they might say, you know, we aren’t interested in insuring you or we’re going to insure you at a higher rate because our actuarial science says that you have a higher likelihood or a lesser likelihood to file a claim on this and the only claim that you’re going to file is if you’ve passed away.
RL – Right. So they’re going to check and make sure you’re healthy before this.
CM – Sometimes you don’t need to. There are certain plans, especially through work. A lot of times I know they offer where you don’t have to do any underwriting and that’s okay. So you just have to make sure you know which one you’re looking at. And then maybe the cheaper one does have the underwriting and the more expensive one doesn’t. And you have to decide is it worth it?
RL – One of the things that these senior policies do is they usually have two tiers. They usually have the one where they have a limited underwriting one where they ask maybe twenty questions, do you have diabetes? Do you have high blood pressure? Have you had cancer? These kinds of questions. And then they have the ones that there are no underwriting questions at all. Typically those policies, there’s a caveat, and it says that if you die in the first five years, we’re not going to give you the full face value.
We’re going to give you a percentage of what you’ve paid. So they might give you all of the money back that you paid. So if your premium is $200 a month or something like that with that and you live three years, well you might get 80% or 90% of that money back as a benefit. Whereas if you were to live the full five years, you would get the total benefit. So that’s one of the caveats that goes along with those policies and they can be very useful. For the right person in the right case, there’s nothing wrong with a senior life policy. Now just because there are so many different kinds of life insurance, there’s going to be any number of different costs.
CM – We kind of talked about how you get different prices based on your health sometimes depending on underwriting, but it doesn’t have to be expensive. It can be as low as $20 a month or $25 a month all the way up.
RL – Whatever you need. There are life insurance policies for people who, like when we talked about estate planning, they’re buying multiple million dollar policies. And this is the expensive kind of insurance, the universal life policies or the whole life policies because that money needs to be there at the death. So don’t be afraid. Call up, find out, and getting some is better than none. Sometimes, if we’re planning for a final event 25 years before it looks, you think, well you know $25,000 might be enough. And you know what? Anytime someone does pass away.
CM – Leaving anything is a gift to the people that are left behind.
RL – It is a gift. So do some research, pick up the phone, call an insurance professional, call us.
CM – 1-800-452-6826.
RL – We’re going to talk about two things that are in the genre of life insurance. The first one is long-term care. So what is long-term care? That is the kind of policy that you purchase so that if you end up in a nursing home, your family does not have to dig into their pockets and/or into your pockets to eliminate any assets you might have to take care of you.
CM – The thing I think that’s classically thought of for this is Alzheimer’s. Your physical appearance isn’t that you can’t walk or can’t do dishes or maybe even you’re very good at still playing the piano or doing crafts. But you still need care every day. It might just be for cooking and cleaning, or it might be for a much more, depending on the progression. And it could be not just for one year. You can live with this disease for years and years and years.
RL – There is a kind of insurance that is called long-term care and it is a very specialized kind of insurance. Some people buy it. There’s three categories of people that look, when I look at someone who’s going to want long-term care insurance. If you don’t have any assets, there are three different kinds. So you have people with no assets. They’ve lived their life, they don’t have a lot of money or they already spent them on their care. If they need to go to a nursing home, they’ve got no money, the state of Oregon is going to put you on Medicaid and going to pay for that, so you don’t need to have long term care for that person. The state is going to take care of it.
Then there’s the people who have plenty of money and there are a lot of people in their 70s and 80s, 90s, who have assets and thousands or millions of dollars in the bank. Well, they don’t need it because they can pay for their own care. It’s the people in the middle who have worked hard. They’ve got some assets. They want to protect them. If one spouse goes into a nursing home, it could be financially devastating to the others, to the other spouse.
CM – I mean, it could be their entire social security check or more.
RL – And that’s exactly how Medicaid would take if you were to the point where you’re with Medicaid. In order to get Medicaid, you can’t have any assets. Literally you can’t own a home. You can’t own a car. You basically have had to liquidate everything you have in order to take care of yourself in order to pay for it. So that’s how you get the Medicaid.
Now, the people in the middle who have worked hard to build some assets don’t necessarily want to go to that point so that they can afford to take care of the spouse or themselves in a nursing home. So those are the people who need it. We’re going to flip real quickly over to disability income. Disability income is a product that if you are hurt at work then the insurance company provides coverage, provides income to keep your household going. This is also very technical.
CM – And it’s normally a portion of your income. So it’s kind of more they take what you were making and then they say based on the policy you purchased, and it depends on the policy you purchased, we’re going to pay you maybe 60% of your income while you are disabled and that’s going to be that disability. They do have some deductibles, and the deductibles tend to be time deductibles instead of money deductibles. So if you’re disabled for let’s say four months and then after four months then you start receiving that payment to make sure that your family can continue on even with a portion of your income even though it’s not the full amount.
RL – This is a product that doesn’t get sold a lot because the insurance companies typically don’t want to insure anybody that uses their body in their jobs. Meaning that if you’re a contractor and you pick up a shovel occasionally, you’re not going to be able to buy it. They don’t even like to insure insurance agents because, I don’t know why.
CM – Carpal tunnel? RL – I don’t know, but it’s also not cheap. And so mostly medical professionals and lawyers and people who have high incomes purchase this kind of insurance.
CM – It is interesting to look at though, and if you do have it through work, I know some people can buy this type of coverage at their workplace. It’s not a bad idea to look at, especially if you have maybe a lower life insurance policy and then you can supplement it with this disability one. If you’re worried more about disability instead of death because it’s a higher possibility, I think actuarially.
RL – That you will be disabled then it is that you will die. And if you’ve got a single income household, it’s all dependent on one person. If that person has a nice high income and they get injured or hurt and they can’t go back to work, it’s just as devastating, maybe even worse than if they’re passed away because you have the ongoing medical bills and the cost of care for that person.
CM – So this is complicated. Don’t do it yourself.
RL – Those are two products that I suggest you don’t do it yourself. We don’t sell long-term care. I’ve put that off to someone else every single time because it is so complicated and there are so many different nuances to it that we’ve made a decision we will recommend a professional that does that.
Contact Bancorp Insurance with Your Life Insurance Questions
CM – If you have any questions about life insurance or any of the products we talked about today, you can give us a call at Bancorp Insurance at 1-800-452-6826. You can also find us online at www.bancorpinsurance.com. You can listen to this show or all of the shows that we’ve done, and we did two on life insurance, so it’s a two-parter. Or you can listen to all of the other fun stuff we do. Again, give us a call if you have questions, 1-800-452-6826.