Life Insurance

Shortly after my wife and I got married, I took out life insurance policy.  When our second child arrived, I took out another policy just to make sure my family would be cared for if something were to happen to me. I started writing this post around that time and never got around to publishing it. When I heard the story below about two people I went to college with, it prompted me to dig this post out and go ahead and publish it.

A few months ago, two brothers who I went to college with entered the hospital.  The older brother had a liver problem and the younger brother was going to donate part of his liver. (Your liver is one of the only organs that will grow back.) I don’t know exactly what happened, but something went terribly wrong, and the younger brother that was donating part of his liver died. a few days after the operation.  He was in his mid thirties and left behind his wife and three young children. Unfortunately it doesn’t appear that he had life insurance–or at least he didn’t have enough to adequately provide for his family. Family and friends are gathering donations to help the family.  While the real tragedy is that the children and wife have lost their dad, it is unfortunate that they have financial difficulties on top of their loss.

If you have people who you want to provide for in case of a tragedy that resulted in your death,  take the time to get life insurance. Right now life insurance is at a historically low price point.  If you have ever thought about getting life insurance, now might be a good time to look at it. (If you want to see how low, checkout this comparative quote service for some idea.)

Purpose of life insurance

People buy life insurance for different reasons. What makes sense for one person won’t make any sense for someone else if they have different goals. Usually life insurance is purchased on the primary wage earner in a family with the goal of taking some of the financial strain off of the family of the wage earner dies early.  For example, a family that earns $50,000 per year and lives in a house where they owe $150,000 might want to get an insurance policy that would pay off the house and provide $50,000 per year until the kids get out of college. Insurance for this type of situation is called term life insurance.

Other people want life insurance as a way to save money for the future in addition to the insurance component.  Their goal is to have insurance if they die unexpectedly and value that they can cash in when they reach retirement age. This type of insurance is called whole life insurance.

Term Life Insurance

Term life insurance covers you for a specific period of time–usually 20 or 30 years.  Since the insurance company isn’t trying to insure you when you reach the end of your life expectancy, the rates are usually pretty cheap.  A 30 to 35 year old male should be able to get a $500,000 30 year policy for around $450 per year.  It is significantly cheaper the younger you are.

At the end of the “term” the policy has no value.  You only get money back if you die–well you don’t get the money, but someone you specify does.

Term life insurance is a very inexpensive way to remove the risk of your spouse needing to go back to work, losing the house or having trouble putting your kids through college. Most policies require a minimal amount of health screening–simple enough that someone can come to your home and do it in 15 to 20 minutes.

Whole Life Insurance

Unlike term insurance whole life insurance accumulates value. The idea is that it functions as an insurance policy during the early years and late in life you can withdraw the cash value. This means it acts like a term policy early on–if you die your heirs will get more than you put in.  As you age, you eventually get to the point where you are basically just going to get back the money (with interest) that you originally put into it. Since insurance companies are going to have to pay the value back to you regardless of when you die, the premiums are necessarily higher–part of what you are paying is simply going into an investment that they will return to you.

For many people with some level of financial experience, whole life may make less sense than taking out term life insurance policy and investing money on their own for retirement.

Now there is a potential benefit of whole life insurance and that has to do with the tax treatment.  The money growing in the insurance policy investment grows tax free–just like a 401k or traditional IRA. Further more, you can borrow against that value once it has grown to a certain point. If you see advertisements saying that you can “borrow from yourself” or  “not pay any interest on loans” this is often what they are advertising. Of course you can borrow from many 401k accounts too, so their still may be very little benefit over the term life insurance and managing your own retirement.

Life Insurance Application Process

I have term life insurance so I’m going to talk about the process of obtaining that. I would imagine it is similar for whole life, but I can’t speak from personal experience.  (If you have experience with purchasing whole life insurance please leave your experience in the comments.)

I got a 20 year policy after I got married.  After our second child was born I decided to get another policy for 30 years.  I checked with my financial adviser who manages my retirement accounts, my local insurance agent and an online service that gets bids from several different companies so you can compare them.  In the end I got a much better price from a place I found through the online service and went with them.

When you buy insurance, they want to make sure you aren’t just getting it because you have a high probability of dying.  The lowest rates are based on you being a normal person who doesn’t like to do risky things.  So part of the application asks you questions like:

• Are you in the military?
• Do you plan to go hang gliding, sky diving or pilot a small plane?
• Do you have any plans to go to countries that are currently in the middle of a war?
• Does your job involve hanging from tall towers?

Once they are convinced that you aren’t unusually risky, they will work on getting a medical checkup.  In my case they sent a nurse out to our house.  She took urine and blood samples, bloodpressure, heart rate and got a medical history. Once the results of that came back, they confirmed that I looked like I wasn’t going to kick the bucket anytime soon and said that they would offer the policy at the quoted rate. I’m assuming that if I had of been a sky diver or had bad blood pressure they would have offered me a policy at a higher rate.

With a few pieces of paper faxed back and forth, they took my initial premium via a credit card and then sent me my policy along with an address to send a check for the yearly policies for the next 30 years.  Many places offer monthly, quarterly or bi-yearly payment options, but it is usually cheaper to pay once per year.

Conclusion

Regardless of your goals for life insurance, now is a good time to check into getting a policy.  Rates are low and the older you are when you start the higher your premiums will be.  The insurance agent you get your car and homeowners insurance through may be a good place to start, however make sure you check out a comparative quote services like this or this just to make sure you are getting the best possible deal.