Simply put, if you have people who love you and depend on you financially, you need life insurance. This is a very difficult subject to talk about because very few people feel comfortable enough to talk about death. In fact, I was sitting down with a family in Fontana, CA and the spouse was driven to tears just thinking about losing her loved ones. Even though life insurance is not fun to discuss, that fact does not diminish the need to prepare for the inevitable.

Life Insurance Serves Many Purposes

Throughout your life you will experience different phases in which life insurance can fulfill a specific purpose. The following examples illustrate the various uses of life insurance.

Single People

People who are not married and have no kids do not typically consider life insurance as a need. However, if you are providing financial support for aging parents or siblings who lack the ability to care for themselves, you should consider life insurance. Unfortunately, some debt passes to your family members, but money from life insurance is not considered part of an estate so it is free of estate taxes.

Married Couples

After the 1950s, families needed dual incomes to get ahead financially. If a wife makes $50,000 a year and the husband makes the same, chances are the family is living at least a $100,000 lifestyle. If one spouse unexpectedly passed away, the family would suddenly have to survive on half the income. Funeral Expenses, plus all of the existing expenses such as credit card balances and outstanding loans that are still in both names still have to be paid.

Parenthood

Raising a child is sometimes the most difficult and rewarding challenge that parents will encounter. Baby formula, baby food, diapers, clothes, toys, and college are a few of the many expenses for parents regardless of socioeconomic status. The US Department of agriculture estimates that the average cost to raise each child is $235,000 (not including college). If your income suddenly stopped upon your death, would your spouse be able to provide your children with the same lifestyle that the two of you always dreamed about? How would you pay for their sports, dance, and college? If you are a single parent, how would your passing away impact your household?

Homeowners

The title of home ownership is a misnomer since a home cannot technically be owned until mortgage payments end. Life Insurance can be used to pay down partial or full mortgages. Some companies offer life insurance policies that equal the number of years remaining on a mortgage. For example, if a mortgage has 28 years left, some companies offer 28 year term life insurance policies. Besides the strictly practical use for life insurance, a family who receives a death benefit can also use the money to maintain their existing lifestyle.

Retirement

If the pitfalls of life never visited you during the early years, consider yourself lucky. Now that the kids have graduated and they have stable incomes, and your home is paid off, people have perhaps taught you that there was no longer a need for life insurance. That stated, what would happen if you died today? Would your spouse have enough money to maintain the same lifestyle for 10 to 20 yrs? Contrary to popular belief, this is the best time to have had life insurance with some cash savings. Structured properly, you can begin to live on the compounding interest that has accrued over the years. Term insurance during this phase of your life gives you peace-of-mind, and cash value life insurance gives you lifestyle. What is so great about insurance is that you can’t lose. It’s a fixed fight. If you die too soon, your family is going to benefit financially by maintaining their current standard of living. If you save and survive, you put yourself in a position to have more money to spend during retirement.

This is a true story about Angie, a person I will never forget. She was not a person one would think would need a life insurance policy. She was not married, not a home owner, and she had no children. She sat down with me because she had two financial goals. One was to have a comfortable retirement from her job in San Bernardino. The other was to take care of her mom and two of her siblings just in case.

The First Phone Call

I was getting a few groceries one evening at a local supermarket when my phone rang. After a long day, I looked at my phone to determine if I wanted to talk or not. When I saw that it was my client Angie, I was puzzled because she never called. I answered the phone curious to find out why she called. After a few seconds of small talk she said, “I’m calling make sure that my life insurance policy is still active.” I informed her that it was, and then asked her why she was asking.

She said, “You are the second person that I called because I have something important to tell you.” I said, “Tell me.” She said, “I just found out that I was diagnosed with breast cancer. I am deciding to believe that everything will be fine, but I just wanted to make sure that the life insurance policy is in good standing”.  Wanting to reinforce her belief, I said, “I’m believing with you that everything will be fine.” We ended the conversation and I said a prayer for Angie before I resumed to grocery shopping, but with a heavy heart.

Angie’s Second Phone Call

I made it a point to call Angie once a month to check on her. She told me month after month that she was fine, until one month she called me before I called her. “Hello, Dr. Cooper?”she asked. “Hey Angie!” I said, happily surprised but concerned why she called. She told me that the cancer spread aggressively and she was on her way to surgery to have a mastectomy. I was hurt to hear the terrible news, and honored at the same time that she thought enough to inform me as she was facing the most traumatic event of her life.

Two days later she called me, and I could tell from the background noise that she was still in the hospital recovering. We set up a breakfast a month from that day to celebrate her life and survival. When we sat down, she just kept telling me how blessed she was and how much more she appreciated life and the simple pleasures it gives. From that day, I decided to call her about once every three weeks to touch basis with her.

Angie’s Final Phone Call

About a week after our previous conversation she called me again to tell me that the cancer was back, but this time it metastasized into her bone marrow. Speechless, I paused for about ten seconds, and she said something that I will never forget. “Len, don’t worry about me. I believe that I am healed and besides, God is in control of my life regardless of what happens.” I immediately felt ashamed that I felt enough pessimism for her to sense that she had to lift up my spirits with her optimism. After this call, I wanted to be the one initiating our telephone conversations.

As I was driving, I saw her name appear on my telephone. I felt a weird feeling in the pit of my stomach. However, wanting to learn from the previous call I received from her, I answered with as positive of a voice as I could muster. This time, her voice was faint. She asked me if she could re-arrange the percentage of the life insurance death benefit to her beneficiaries. I explained that her request had to be in writing, but I would have the insurance company email her the paperwork. Immediately after the call, I reached out to one of her colleagues at work who was also a client. I asked her to check on Angie, but not to let her know that I initiated the visit.

The Most Difficult Phone Call

The following day, I called Angie’s colleague to give me a report about how she was doing. She told me that she went to visit Angie’s classroom, but there was a substitute teacher there instead. So I called Angie, but there was no answer. Despite all the negative feelings that swirled in my heart, I convinced my head that everything was ok.

The next morning at 5:48 I received a phone call. I answered the call listening to a man whose voice I did not recognize trying to maintain composure while he asked to speak to me. Suddenly, he burst out crying saying, “She’s gone, she’s gone.  Angie’s gone!” Lost for words thinking about the fact that she was only 48 years young, all I could do was express my sincere, but seemingly empty condolences.

The Power Of Life Insurance Hit Me

A week after the phone call, I attended Angie’s funeral. I walked up to a young lady, who was obviously Angie’s sister to introduce myself. What happened next, forever changed my perspective about the life insurance profession. Her eye’s opened widely with delight, and as she gave me a hug she said, You’re Dr. Cooper? Angie talked about you all the time. Thank you so much for what you have done for my family!” I hurried to accept her gratitude before she could see the tears that flooded my eyes. At that moment, I realized that within a week, Angie’s mom will have paid off her home and her brother and sister would be debt free with money to spare.

When Angie purchased life insurance, we never thought that she would use the death benefit for her mom and two siblings. She wanted tax-free income during retirement. Had Angie not been motivated by what insurance could do during her lifetime, she would not have decided to purchase life insurance. Angie’s choice to get life insurance changed her family’s life. Not only that, it completely changed my professional life because I gained a level of conviction that my profession significantly transforms the lives of my clients and their loved ones. I now want every individual and family to have the same piece-of-mind.

Most of us believe that insurance is only for our loved ones when we die, but some types of life insurance fulfills a variety of personal needs and wants while we are still living. The following points can help you decide how to choose between term insurance, permanent insurance, or a combination of both.

Term Insurance

Advantages

• Cost of insurance is lower. If you are healthy, you can buy dollars for pennies
• Ideal for young families who have a limited budget but have a need for lots of insurance
• Coverage lasts between 5 and 30 years. For example, if a person has 24 years left on a $250,000 mortgage, they can get $250,000 of coverage for 24 years.

Disadvantages

• Once the contract ends, it is expensive to renew
• If the policy lapses, it is very difficult to reinstate
• Term policies do not accumulate cash value
• Coverage ends

Permanent Life Insurance

Advantages

• Offers coverage for the insured’s entire life as long as the premiums are paid
• Premiums can be flexible or fixed depending on different financial needs
• Significant tax advantages
• College savings inside of cash value do not increase the parent’s expected financial contribution for college
• No probate. If a spouse passes away, the proceeds from insurance can’t be used to pay outstanding debt in the insured’s estate
• The policy accumulates cash value, which the insured can access during his or her lifetime and, if structured properly, can provide income during retirement

Disadvantages

• Initially larger premiums are required to properly fund this type of policy
• Some plans provide few or no guarantees, and while increased benefits may occur, poor investment performance can cause a reduction in the cash value account, the death benefit, or both. Be sure to get the product that best meets your needs and risk tolerance

Combination of Term and Permanent Life Insurance

To determine if you need both types of life insurance, consider using the DIME method:

D = Debt – If you pass away prematurely, you want to make sure you consumer debt like outstanding car payments or student loans for your children.

I = Income – It is recommended that you get between 7 to 10 times your income in coverage. This amount is meant to replace your income for 7 to 10 years.

M = Mortgage – How much does is your mortgage?

E = Education – When your children do go to college, how much will it cost for them to attend college four or five years?

When you add up these four figures, you will know how much insurance you need. Your debt, mortgage and education are temporary, so term is appropriate to cover those amounts. Your income will hopefully increase over your lifetime, so permanent insurance is appropriate for this amount. However, this example is over-simplified to provide a basic understanding. Every individual and family has a different set of circumstances, and therefore, you should see an insurance expert to discuss your specific needs.

This blog post is a continuation of a 7 part series on life insurance. You can find the first post here: http://www.your-insurance-experts.com/why-get-life-insurance-part-1/

How to Outpace Inflation Using Life Insurance

There are lots of different types of investments that people use to outpace inflation. It’s reasonably safe to assume that every investor desires to sacrifice capital now for a greater amount of capital in the future. The difference is how people plan to get the greatest return on their investment given their ability to tolerate risk. Some like stocks, bonds, or mutual funds. Each one of these investment vehicles have the potential to have very competitive gains. However, the downside is the risk to lose the gains in a down year.

When your money is in a market that can lose investment capital, you might be surprised how long it takes to recover from the losses. For example, let’s assume you are aggressive, and you decide to take some market risks for potentially attractive gains. You invest $100,000, but the market goes in the wrong direction and you lose 50% of your portfolio. Looking at the math, the value of your portfolio is now $50,000. During the following year, the market recovers and goes back up by 50%, how much do you have in your portfolio? If you answered $100,000, your response was the same as 75% of the people in which we ask this question. The correct answer is $75,000 because 50% of 50,000 is $25,000. This exercise is not meant to be a tricky math lesson, but more of a way to illustrate that losing your money to market loss is dangerous because it takes two-percent of an increase to recapture every one-percent loss.

The cash you place inside of permanent life insurance depends on how you prefer to combat inflation. One approach is to place the cash value directly in the market. With this strategy, you can participate in all of the gains that the market has to offer, but you also participate in all of the losses from the market. Someone who has a high risk tolerance may choose this approach if they have the discipline to think long-term and the discipline not to react emotionally when the market conditions are temporarily unfavorable. As stated before, a one-percent loss creates the need for a two-percent gain.

Another strategy that you can use is an equity indexed life insurance approach. In this case, the money you earn is not actually in the stock market so it is not subject to the losses. In other words, when the stock market has a positive year, your cash value will experience a gain up to a percentage that each insurance company determines. That “cap” rate is typically around 10 percent; some companies are slightly higher and some are slightly lower. If the market gains more than the cap, you will earn what the cap rate allows. If the market, however, experiences a loss during a year, you will not risk any of your principle due to market loss. This strategy is for a moderately conservative person who is willing to forego some of the market gains to eliminate the market losses.

In the next blog post, I will explore how to use Life Insurance to Save on Taxes. 

This blog post is a continuation of a 7 part series on life insurance. You can find the first post here: http://www.your-insurance-experts.com/why-get-life-insurance-part-1/

Life Insurance Solution – Financial Swiss Army Knife

Maria, the financial planner, asked Justin to consider a properly structured Indexed Universal Life Insurance (IUL) policy. Considering that Justin wanted to make a responsible decision that was best for his family, he asked Maria to explain how it works. Before Maria was willing to give any details, she had to make sure Justin realized that he would not deviate from the plan, short of a life altering emergency. Justin agreed.

Maria began to explain that the foundation of this plan is permanent life insurance. Justin politely interrupted Maria to inform her that he already had a permanent policy. Surprised, Maria asked Justin to get the policy so she could see it. Even more surprisingly, Justin had an indexed universal life policy, but it was not structured to provide the most efficient financial benefit for Justin. His IUL was structured to make the minimum payment possible to cover the death benefit.

In order for Justin to use his policy to outpace inflation, Maria encouraged Justin to take his extra income to maximum fund his Indexed Universal Life Insurance. Justin looked puzzled because that meant instead of paying $400 a month for a $500,000 policy, she asked him to put away $1,400 a month. Noticing Justin’s non-verbal disapproval of her suggestion, Maria asked, “If I asked you to put $1,000 a month into your bank account, you wouldn’t say that’s too expensive, would you?” “Of course not”, Justin replied, “It’s my money.” “Exactly”, Maria explained, “Making deposits into your bank account isn’t a cost. In fact, it’s a favor you are doing for yourself now to significantly benefit you later. This is the same way you have to view your IUL.” Justin began to look at her idea differently, and was open to hear what she had to say.

Regarding investment and financial matters, we are either uninformed or misinformed. As a result, it is very difficult for us to distinguish between truth and opinion. In the case of cash value permanent life insurance, misconceptions often run amok because some of the people who offer their opinion are well respected and popular. No matter what, every investment has pros and cons.

In the next blog post, we will discuss why it is my opinion that cash value life insurance is the best place to allocate your retirement income so that you can Outpace Inflation.

I recently sat down with a newlywed couple in Rancho Cucamonga who wanted to know if it made sense to increase the amount of life insurance coverage to achieve their overall financial goals. They each showed me a policy that they purchased a number of years ago. I was surprised to see that each of them was paying about 30 percent too much for their coverage. Similar to gas stations and grocery stores, you will find cost variation, but 30 percent is too much of a difference. People work hard for their money and therefore, deserve to save it, spend it, or invest it. Here are some ways to suspect that you are overpaying.

Know about mortality trends

There are secrets about the insurance industry that everyone should know to ensure they have the best possible policy. This particular secret could potentially impact every person who owns a small term policy to a multi-million dollar permanent policy that is accumulating tax-free retirement income, and every policy between.

Life Insurance companies pay large sums of money to know to the greatest level of certainty the lifespan of males and females. Prior to strict legislation that held insurance companies more accountable, a small number of those companies unscrupulously overcharged their clients to pad their profits. In response to this act of greed, the industry developed a standardized pricing system for life insurance in 1958. This system was called the Commissioners Standard Ordinary Mortality Rates (typically referred to as CSO).

During the 50s people had shorter lifespans. This fact is important for insurance companies for obvious reasons. Consequently, people who purchased life insurance policies during that era had to pay a higher amount for their insurance.  Another mortality study was done in 1980 to reflect the changes in life expectancy. The most recent mortality study was conducted in 2001 which revealed that people were living even longer than the people in 1980. The CSO table in 2001 reflects a 30 percent reduction in the cost of insurance compared to the table in 1980.

A reduction of 30 percent means that you can purchase $130,000 of life insurance for the price of $100,000 or you can pay $70 for the same amount of insurance instead of $100. If you have the right kind of policy, you could take the extra $30 and use it for tax advantaged cash value accumulation.

Secrets of some Insurance companies

Every industry needs an agency to regulate unethical practices. Devoid of such an agency, a small number of individuals inevitably fail to resist the temptation to amass more profits. The same is true in the insurance industry. Specifically, the 1980 CSO tables were not enforced until 1989. To properly put this into perspective, let’s assume you are a business owner and you find out that a new procedure takes effect next January that will reduce your profits by 30%, but you are not forced to implement the procedure. How quickly would you integrate that practice into your business? Chances are you probably would not be in too much of a rush, would you? Neither were companies in the insurance industry.

Know how this secret impacts you

It’s January 1986 and you just made a New Year’s resolution to lose weight. On the 28^th you see the Space Shuttle Challenger explode on television, which prompts you to protect your life against some unforeseen accident. If you purchased a life insurance policy in 1986, chances are the prices you paid was based on CSO table of 1958, nearly 30 years earlier. If you knew this secret, it would have saved you a ton of money because the rates in the late 50s cost 40 percent more.

In other words, if you invested $100 a month earning 6 percent annually for 30 years, you would have $94,869.82. If you invested $140 a month (40 percent more) earning 6 percent annually for 30 years, you would have $132,817.75 or $37,947.93 more.

Everyone knows they need life insurance, but the essential question is, are you overpaying for yours? I encourage you to look at your policy issue date to see if that is possible. Secondly, you might consider having a local insurance expert examine your policy. You may be leaving lots of money on the table that could benefit you greatly.