Last week, Emma Morano of Italy celebrated her 117th birthday…kudos to her! This notch in her bedpost as the oldest person in the world reminded me of a conversation a client and I recently had regarding life insurance.
Common thought is that “Whole Life” or other permanent life insurance policies are built to last as long as you may live and, as long as you keep paying the premium. Unfortunately, this is not always the case.
Life insurance, as with all other kinds is based upon statistics. Insurance companies use what are known as mortality tables to determine the expected life span, premium, and the true cost of life insurance (premium minus any dollars used to build cash value in the policy). Most insurance companies do not research and create their own data; this would be too cost prohibitive. They purchase it from organizations that have the expertise and a proven track record with accurate information. The most common of these are the Commissioner’s Standard Ordinary (CSO) Tables published by the Society of Actuaries.
Prior to the year 2001 the CSO tables (as with most others) only calculated data to age 95. Consequently, life insurance policies could only run until that age. Beyond 95, insurance companies did not know how or what to charge a policyholder. As a result of industry pressure, and the reality that people were regularly outliving their life insurance policies, the Society of Actuaries spent nearly $12 million in research studies to extend the CSO tables to age 121 in 2001.
The client and I, which I referenced above, were having a light-hearted discussion about the feasibility, or lack thereof, to reach age 121. After seeing Ms. Morano’s recent birthday celebrated in the news, the concept may not be as far-fetched as I first thought.
Will the Society of Actuaries have to extend their tables again in the coming decades? Who knows? What I can say is that many of my clients struggle with the innumerable options and complexities that are in the life insurance space. Life insurance is important. It should part of every family’s protection plan, regardless of how much it may overwhelm you.
My job is to protect our clients by helping them to make informed buying decisions. I thought it would be appropriate to leave you with three simple life insurance tips to help better protect you and your family:
- Understand why you’re buying itIs it to pay off debt, handle childcare expenses, a funeral, or maybe something else? That’s fine! Life insurance can be tailored to fit nearly any situation and that’s where we come in. We help determine the right amount and type of coverage you need but can’t do that without knowing why you need it. Have an honest discussion with your loved ones about what will be necessary to support their financial well-being.
- Buy the right amount of coverage regardless of typeThere are primarily two types of life insurance: Term and Permanent. Term policies last for a set number of years (generally 10, 15, 20, or 30) and permanent policies (whole and universal) are intended to protect for most, if not all, of your life. I think permanent life insurance policies that generate cash value are fantastic but do come with a higher price tag.Let’s pretend for a moment your name is John, and your family’s life insurance need is a $500,000 policy. You really want a permanent policy, but can’t afford one of that size. You take out a $200,000 permanent policy that fits your budget.Twelve years go by and the unexpected happens, you pass away. Will your family say: “John knew we would need $500,000 but at least his $200,000 policy would have lasted for his whole life”? No. They won’t.There is nothing wrong with term life insurance. Get the right death benefit on a plan you can afford and properly protect your family.
- Leverage compound interest to “Short Pay”Policies that have a cash value component generally have some sort of interest rate that is earned over time. That interest and your principal cash value compound, growing your cash value more rapidly the longer the policy is in force. If you are taking out a policy earlier in life (in your 20’s, 30’s, or even 40’s), you may be able to short pay your policy for less than a few dollars per month.Short paying allows you to permanently stop making payments on a policy at a specific age without jeopardizing any coverage. Many people choose their expected retirement age but there are no rules. By regularly paying a small extra premium, you are taking advantage of that compound interest. It could save you thousands of dollars over the life of the policy, not to mention one less bill during your “golden years.”