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.

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.

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.