Do You Have Appropriate Life Insurance?


English: Atlanta Life Insurance Company est. 1...

English: Atlanta Life Insurance Company est. 1910-20 (Photo credit: Wikipedia)

Earlier this week I was asked a variation of the question, “Do I have appropriate Life insurance?”  Below is the actual question I was asked and the answer I gave.

QUESTION

My husband and I purchased what I understood to be “term” life insurance through his employer last year. I am now getting interest earned statements in the mail calling our coverage “Universal”. I am concerned that if something were to happen to either of us we are not really covered for the 500k that we thought. I asked our insurance agent “If I die today, will my family receive 500k?” To which he responded “let me look into it and I will call you back”. Which has really got me worried that we do not have adequate coverage.

I have been told that cash policies and universal policies are bad to have…can you help me understand?

ANSWER

I know that what I am about to say is going to sound like something a politician would say. What I am about to write is based on my opinion and experience. A different insurance agent may say something different.

I am not a huge fan of Universal Life insurance. I was a new insurance agent when every insurance company that sold UL got sued and fined in the early 1990s. There are only a handful of us who remain. In my opinion, people are better off with a “Combination” plan that includes both Whole and Term Life insurance.

Universal Life is normally interest sensitive. It builds a cash value from which future premiums are taken. That cash value grows according to annual interest rates that are declared by the insurance company each year; much like a bank declares an interest rate for a CD when it renews. If there is not enough money left in the “Accumulation Fund” to pay premiums, the insurance company will increase your premium. That does not normally happen for policies that have not had policy loans or withdrawals from the “Accumulation Fund” until the policy holder is in their 80s or 90s.

When your agent hesitated, it was because he did not know if you had taken a policy loan or withdrawal. Also, U.L. has 2 different death benefit options. If you have not taken any money out of your policy, your death benefit would be the full $500,00 if you elected Death Benefit Option A (1). Death Benefit Option B (2) would pay your beneficiary the face amount of $500,000 plus whatever the value of your Accumulation Fund was on the date of your death.

Permanent Life insurance plans have their purposes. However, unless you are looking to use the “cash value” in the policy for a future financial reason, what you really need is “Term” Life insurance. Unless the death benefit and type of policy was recommended to you by your estate attorney, I cannot see any reason you need $500,000 of Universal Life insurance other than it would produce 2-4 times the commission for your insurance agent.

In my opinion, you would have $25,000 – $50,000 of Whole Life insurance for burial and other permanent Life insurance needs. If you have children still at home or other debt that needs to be paid in the event of your death, you would use Term Life insurance to cover the balance.

What you would save in Life insurance premiums could be used to pay for premiums for a Long Term Care or Disability Income insurance plan for the wage earner in your family.

In my opinion, you do have reason for concern and need to do some more shopping. I do not know who your life insurance agent is, nor do I have any reason to think that he/she has intentionally sought to defraud you. Rookie agents are only as good as the training they get. However, if you were sold a $500,000 U.L. when Term insurance was more appropriate, red flags of warning should be flying in Kansas. Not only should you review your current Life insurance, you should review whether or not you wish to use the same insurance agent in the future.

I am certain that there are scores of insurance agents in your community that would be happy to help you. The key is to know what you want before you engage one. If you cannot find one locally whom you trust, let me know.

Unless your estate planning attorney advised you to get $500,000 of Life insurance, something sounds suspicious. Normally, that high of Death Benefit is used to replace income in the event a wage earner dies. With today’s interest environment, it is highly unlikely that $500,000 is enough Life insurance. For what you are paying for $500,000 of U.L. that would only replace an income for a few years, you could purchase enough Term Life insurance to replace a wage earner’s income for the survivors entire life and still be able to give the kids a full inheritance when the survivor eventually dies.

If the purpose of the Life insurance is just to pay off a mortgage, unless you still owe $500,000 to the bank, you have too much Life insurance.

Not only do I recommend that you review the type of Life insurance you have, I recommend that you review how much Life insurance you actually need. Don’t buy any more or any less than what you and your family need.

I hope this information helps. If you are still confused, let me know and I will try a different answer.

UPDATE:  The day after I wrote this response I got justification for my concerns about Universal Life.  I got an email from one of my Life insurance brokerages that some insurance companies are about to suspend the sell of guaranteed Universal Life policies.  It appears that the insurance companies do not want to chance a repeat of the 1990s in our current interest rate environment.

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