Last week I wrote, “Does Everyone Really Need Life Insurance” In that post I mentioned that I do not agree with the philosophy that “Everybody needs Life insurance.”
As far as I am concerned, if you hear any insurance agent say that you need to run. That agent is more interested in selling policies than solving your insurance problems. It is a sign that your insurance agent has been poorly trained. There should always be a legitimate reason you are spending your money for Life insurance.
The idea that you need Life insurance just because your parents told you is not a sufficient reason to buy insurance. If you are going to buy Life insurance, have a reason why you spend money for it or don’t waste your time and money.
When you first spoke with your insurance agent you should have told him what you wanted to accomplish and how much you were willing to pay. If what you want to do cannot be done for the money you can pay, a good agent will explain that you have 2 options.
- you may need to pay more than you originally thought or
- you may need to choose what benefits you are willing to cut
Over the next few days I want to share with you common ways to use Life insurance, what types of plans to use and how to calculate how much insurance you really need.
When I hear, “Everybody needs Life insurance,” I think of funerals. While everyone eventually dies, not every funeral is paid with Life insurance.
Some people have pre-paid funerals. Others have enough money in savings that can be used for Final Expenses. If you have either of these, Life insurance is a luxury that you may, or may not want. It is not a necessity.
No one knows exactly what the cause of their death will be. If your body is vaporized or irretrievable, there will be no funeral. Your family would not need any Life insurance benefits. If you die instantly from an accident and your body is retrievable there will be a funeral but there will be no additional medical expenses. However, if the cause of your death is a lingering disease, such as cancer, you may leave your loved ones with a few thousand dollars of debt for uninsured medical costs.
When I recommend a final expense insurance plan, I generally recommend that people buy enough insurance to pay for a funeral and final medical expenses, such as your deductible and co-pay.
MY INTRODUCTION TO LIFE INSURANCE
When I was a kid, my parents thought that Life insurance was only for funerals. My dad thought that he only needed $500 of Life insurance. I remember the “Insurance Man” coming by the house every month to collect a quarter from my parents.
His thinking about Life insurance was incorrect. He had to spend the last year of his life in a nursing home. It was paid for by Medicaid. Although they allowed mom to remain in the house, Medicaid has put a lien on the house. When mom eventually dies, Medicaid will be paid from the sale of the house before anyone.
Second-to-die (Survivorship) Life insurance could have reimbursed Medicaid for the money they spent on his nursing home and my sister and I would not be forced to sell the house in which we grew up. However, Medicaid’s Estate Recovery is a topic for a future post.
TODAY’S FINAL EXPENSE
Back then, $500 would buy a decent funeral with all the trappings. Today, it will cost more. My rule of thumb is that people need to consider buying a minimum, $10,000 Whole Life policy, for final expenses. There are a couple of different types of Whole Life insurance from which you may choose.
If you buy a “Participating” type of Whole Life insurance, it will pay you dividends. You can elect to use those dividends to purchase small amounts of “Paid Up Additions” or to “Pay Premiums.” Either dividend option will allow you to stop paying premiums out of your pocket at some time in the future.
If you elect to use this type of Whole Life insurance keep in mind that dividends are not guaranteed. They are likely but not guaranteed. They are dependent on the experience your insurance company has. If you use your dividends to “Pay Premiums” you will need to carefully watch your Life insurance policy to keep it from accidental lapse. If the dividend may not be sufficient to pay the full amount of your premium, you will need to send your insurance company the difference.
“Non-participating” Whole Life insurance policies exist as well. The difference between them and “Participating” policies is that “Non-participating” policies do not pay dividends. You will need to understand that the premium you agree to is a life-time commitment. There is generally no scenario in which you can stop paying premiums. You will pay the original premium for the “whole” of your life. It will never decrease.
However, there is something positive about “Non-participating” policies. Your premium may never decrease but it will never increase, either.
Depending on your age when you buy the insurance, “Non-participating” policies are just as good as “Participating” plans. I tend to use “Participating” plans for my clients who have around 20 years of full-time employment left and do not want to make Life insurance premium payments during retirement. I use “Non-participating” Whole Life policies for folk who have already retired.
When I visit with a client for the first time, the first question about Life insurance I ask is, “Why did you buy this particular amount of Life insurance.” Over the years I have heard, “I don’t know” or “That is how much my insurance agent told me I needed” but in 25 years I have never been told,”That is how much I needed and it is to be used to …”
If you are going to spend your money on Life insurance, make certain that you and everyone who will be affected by your death know what it is for and how it is to be used. If you do not, the money you spend each month on Life insurance is wasted.
Life insurance is not appropriate for everyone. However, there are times when it is a necessity. If you do not have a pre-paid funeral or significant savings, your loved ones will be happy you had at least some Final Expense Life insurance when the time comes to plan your funeral.
If you do not already have a relationship established with an insurance agent whom you trust, I would like to apply for the job. You can learn more about me on the ABOUT page of this blog.