You Could Be Paying for More Insurance Than You Need

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Tiffany Hamilton knew as a college student that she would one day be an entrepreneur. With that in mind, she made sure to enlist the help of a financial planning company when she bought her first life insurance plan at 21, as she was just getting her start in real estate.

That first policy was a $20,000 term-life plan that cost her about $80 a month. When her salary increased, she decided she needed more coverage than that. As a single woman with a burgeoning business, she wanted to make sure she had enough coverage to take care of any debts and leave something for her mother..

Her insurance representative at the time encouraged her to up her coverage. So at 25, she converted her policy to a $1 million whole life policy.

“I thought by going to a financial planner, sitting down and answering the questions, and then going off of their recommendations, I thought I was doing the right thing,” Hamilton told MagnifyMoney. “Yes, the $1 million would give my mom X, Y and Z, but was that in my best interests?”

Now 35 and running her own real estate business based in Tallahassee, Fla., Hamilton has lately been wondering: Is it possible to be overinsured?

How much insurance is too much insurance?

As we grow in our careers, home life and families, paying for life insurance becomes another one of those obligatory items on our financial to-do lists, like establishing a 401(k) or an emergency fund. But the sheer volume of life insurance options available may have created a unique problem: Some of us might be overly insured. That is, our insurance coverage may be wildly disproportionate to our salaries and overall net worth.

Joel Ohman, a Tampa, Fla.-based certified financial planner and founder of Insuranceproviders.com, said it’s also easy to end up with a policy that has more bells and whistles than you genuinely need.

Generally speaking, life insurance is a type of coverage that provides a payout to a selected beneficiary in the event of the policyholder’s death. This is often called the “death benefit.” Many people aim for a death benefit that includes a payout substantial enough to cover a few years of the deceased’s salary, funeral expenses and any outstanding debts.

Those with families may also want to include money to pay off a house, children’s college funds and more.

Of course, there are other options for anyone who has a large estate, want to make charitable contributions, needs special tax breaks or has other complicated financial circumstances to consider.

“Unless there are complex estate planning requirements or the insured has exhausted all other investment options, then typically the idea to use life insurance outside of a straightforward death benefit payout is a fool’s errand that will only result in a fancier car for your insurance agent,” Ohman said.

The cost of being overinsured

The difference in premiums between insurance plans can be striking, and if you’re not sure precisely what to get, it’s easy to throw up your hands in frustration. But if you simply choose a plan that may “sound right” without carefully exploring all your options, you could easily wind up paying for more coverage than you need.

Most insurance websites include insurance calculators to make it easy to figure out what your costs could be for a variety of different plans. Using State Farm’s calculator for example, a $500,000, 20-year term policy for a 30-year-old woman in Arizona is about $33 a month. Comparatively, a whole-life policy is $460 a month. That’s a difference of nearly $5,000 a year.

In Hamilton’s case, she realized she was paying thousands of dollars more for insurance than she needed to. In 2016, she converted her $1 million whole-life policy into a $500,000 universal-life policy.

“That cut my budget down by almost $10,000 a year,” she said.

John Barnes, a certified financial planner and owner of My Family Life Insurance, said those cost savings can be important for families.

“My take is, you can be doing something else with that money,” he said. “Families today are squeezed. I’m not about to overextend them, I’m going to get them the right amount.” The additional savings, he said, could go toward retirement, college tuition or other financial need.

Ohman said that a simple term-life policy is a great way to get inexpensive insurance that will still take care of most families’ needs.

“When people are looking for pure life insurance, they want to protect their loved ones if something should happen to them, and they want them to be financially taken care of in a worst-case scenario,” he said. “Ninety-nine percent of the time, then, that cheaper term life insurance product is going to be the best fit.”

Chris Acker, a chartered life underwriter, chartered financial consultant and independent life insurance broker in Palo Alto, Calif., said he almost always recommends term-life insurance to his clients, particularly young families.

“If you’re talking about people in their 30s,” Acker said, term insurance “is hands down the best way to go.”

That’s because it’s an inexpensive way to get insurance that provides coverage for your entire family. Plus, you can always get additional insurance later. But he cautions against applying one piece of advice across all situations.

“The bottom line is, there’s no right answer,” he said. “No two cases are the same.”

Types of life insurance

There are two main types of life insurance: Term insurance and permanent insurance. When consumers typically think about life insurance, they are looking for an option that will provide their families with financial stability if the unthinkable happens. If you work full time for a company, it’s possible that your workplace has a some type of life insurance policy, often equal to one year of the employee’s salary.

But some experts recommend that families purchase their own insurance plan outside of their employer because employer-sponsored life insurance typically falls short of their family’s actual needs.

Permanent insurance does exactly what the name implies: It provides lifelong coverage. In addition to the death benefit also provided by term-life insurance, permanent insurance also accumulates cash value. But with that added benefit comes pricier premiums.


Whole Life


Variable life


Universal life


Variable universal life

Whole life is the most common type of permanent insurance. With a whole life policy, the premium never changes. Part of the premiums goes into a savings component of the policy, which builds cash value and can be withdrawn or borrowed. That cash value also has a guaranteed rate of return.

Variable life offers the same death benefit, but allows consumers the option to seek a better return by allocating premiums to investments like stocks and bonds.

Universal life lets you vary your premium payments and gives a minimum death benefit as long as the premiums are sufficient to sustain it.

Variable universal life insurance is a sort of mix between variable and universal life, meaning consumers can vary premium payments and can also allocate them among investment subaccounts.

Best for: Those who want a policy that offers cash value and stable premiums. There are also tax advantages to this type of policy.

Best for: Those who want the same advantages as a whole-life policy, plus the option of allocating premiums toward different stocks and bonds.

Best for: Those who want the same advantages of any permanent policy with the option of varying premium payments. For example, those who may want to start with a lower premium that increases as their finances do

Best for: Those who want the option to vary premium payments, but also the option to allocate those payments toward different stocks and bonds.


Term-Life Insurance

Term-life insurance provides coverage for a specified amount of time — let’s say 15 or 20 years. Customers pay a premium each month and are covered through the specified term. This is typically the cheapest insurance option.

Best for: Those whose need for coverage will disappear or change at some point, like when a debt is paid or children reach adulthood and go to college. Also good for those looking for a low-cost option.

Even within term- and whole-life insurance, there are additional products you could be offered, like mortgage life, return of premium (in which your premium is returned if you outlive your initial term) and final expense (which covers just funeral expenses). There’s even an option that would provide lifetime protection for your estate upon your death. With all the available options, it’s easy for the costs to add up.

Tips to choose the right life insurance

Use a life insurance calculator. Wealthy families, those with special-needs family members and others in unique situations will also have different insurance needs. Most insurance websites offer calculators to help consumers decide how much coverage to take. The consumer website lifehappens.org also offers step-by-step guidance on choosing insurance, along with a needs worksheet.

Get multiple free quotes. Consumers can also get free quotes from multiple insurers from sites such as My Family Insurance, InsuranceProviders.com and http://myfasttermquotes.com/, which are independent-agent sites for Barnes, Ohman and Acker. Keep this in mind: Getting a quote doesn’t obligate you to work with a particular company or insurer.

Choose the right advisor. It’s also important to understand that hiring an insurance agent or financial planner is just like any other relationship: You want someone who works best for you and inspires comfort. Hamilton said she not only interviewed potential reps this last go-around, she also requested references and asked them about their company philosophy before making a decision. LifeHappens suggests that consumers use referrals to find an insurance provider.

Seek out independent agents. When it comes to actually choosing an agent or financial planner, Ohman suggests looking into independent agents that aren’t tied to a particular insurance company. That’s because a “captive” agent can only recommend those products that his/her company provides, whereas an independent agent can recommend any number of companies. That doesn’t mean they don’t have your best interests in mind, just that they aren’t able to provide customers with options outside their company offerings.

“The only products that they know about, the only products that they’re even allowed to bring to your attention,” Ohman said, are “their own products.”

Understand what it means to be a fiduciary. Another thing to consider is whether the company or adviser you’re working with is a fiduciary. “One of the big advantages you get with working with an insurance agent who has that CFP designation is that they are supposed to be working as a fiduciary, which means they put your financial interests first,” Ohman said.

Those who hold a CFP designation like Ohman are expected to provide fiduciary care to their clients. It’s also perfectly OK to ask your agent if he or she is, in fact, a fiduciary.

By the way, this doesn’t mean that other agents can’t or won’t provide clients with the type of insurance that works best for them. But don’t hesitate to ask if they’re paid on commission and whether a bonus or trip is tied to a particular transaction.

Check the insurance company’s ratings. Once you get a recommendation, he says, make sure the company has at least a A rating or better from independent agencies that rate companies’ financial strength. There are four independent agencies that provide this information: A.M. Best, Fitch, Moody’s and Standard & Poor’s. Do your research and find the ratings from each of the four agencies, because some companies may highlight a positive rating from one agency and play down a lower rating from another agency.

Trust your gut. Barnes said regardless of whom you choose to represent your insurance needs, make sure you have a level of comfort.

“Don’t be discouraged, there are some great independent agencies,” he says. “If it doesn’t feel right during the process, trust your gut.”

That means continuing to be open-minded, but also not allowing yourself to purchase an insurance product you don’t want or can’t afford. During that first meeting or so, Barnes says the agent should spend time getting to know you and your situation without necessarily trying to sell you on a product.

Similarly, Acker says it’s OK to question your agent to make sure you’re getting the best policy for your needs and lifestyle: “Don’t be bullied into buying what someone else says you should buy.”

For her part, Hamilton says she also looked into whether companies were commission- or fee-based. That’s because a fee-based company will charge a set rate, which can ease the worry of having an overzealous rep who may offer expensive products to boost his or her commission.

Because many good policies also offer a conversion option, you’re not “stuck” forever with something that doesn’t actually work for you. That means you have the option to change policies, as Hamilton did. Some consumers also choose to buy additional policies down the road.

But, and this is key, you shouldn’t let uncertainty or the fear of overpaying keep you from getting at least a simple policy.

“Think about today — the immediate need; protect that right this second,” Acker says. “Then that gives you time to work on your financial planning. Then you can figure out if you want to keep the insurance.”

The post You Could Be Paying for More Insurance Than You Need appeared first on MagnifyMoney.

The 5 Things Single Parents Need to Consider about Life Insurance

There are plenty of ways to save at buybuy Baby without cutting your registry and wishlist short.

As a parent, one of the scariest things to think about is what your children will do if something happens to you someday. This can be even scarier if you’re a single parent without a partner to fall back on.

But here’s the thing: you are the sole provider for your children. It’s even more important that you take time to consider all the future possibilities. Here’s what you need to know about life insurance, including how much coverage to get and how much it’s likely to cost.

How Much Coverage Do You Need?

The biggest life insurance question is usually about how much coverage you need. There are all sorts of rules of thumb for this issue. Some say you need seven times your current annual income, while others say more or less.

But how much coverage you need really depends on how the benefit would need to be used if you were to pass away. Ultimately, this depends on a few factors, including the following:

  • How old your children are right now
  • Who would care for them if you were to pass away
  • What that caregiver would need to be able to care for your children
  • How much debt you currently have
  • Whether or not you want to pay for your children’s college costs

Let’s break this down, then, into the five things you’ll need to consider to get the most out of your life insurance policy.

1. Talk to Potential Caregivers

If you don’t already have plans for alternative caregivers for your children, now is the time to make them. Your life insurance decisions will largely hinge on the circumstances of those who would care for your children in the event of your death.

For instance, let’s say you have four kids who would live with your parents if you passed away. If your parents have already downsized into a retirement home, they’d probably need to move to care for your children. In this case, you need to account for their additional moving and housing expenses in your life insurance policy. If they’ve already retired, you may need to consider the other ways that caring for your children would impact their ability to cover their own living expenses.

But what if you have only one child who would move in with family friends if you passed away? If your friends already have a few kids of their own, they may not need to move or add on to their home to accommodate your child. In this case, you may not need quite as much life insurance coverage.

It’s a good idea to have an up-front conversation with potential caregivers. What would they need in order to care for your children appropriately? These are difficult conversations to have, but they’re an essential part of this equation.

2. Think about Your Kids’ Needs

How much insurance you require also depends on your kids’ ages and needs. If you have younger children, you’ll need more coverage—and you’ll need it to last longer. If your kids are older, though, you can probably purchase a shorter policy with less coverage.

Beyond just their ages, you’ll want to consider your kids’ particular needs as well. Are they currently attending a private school that you’d want them to continue attending? Or maybe you have a child with special medical needs. Make sure your policy is large enough to cover those costs.

If you want to fund your children’s college attendance with your death benefit, you’ll need quite a bit more coverage. If you can’t afford to cover college tuition right now, you could also look at college funds as the icing on the cake. In a couple of years, if you’re in a better place, consider upping your policy or adding a second one to cover these costs.

3. Consider Your Current Financial Situation

Even those without children should have enough life insurance coverage to tackle leftover debts and other end-of-life expenses, but it can be even more important for single parents. You’ll want to be sure your children aren’t dealing with a burden of debt while also grieving your loss. If possible, you’ll want to cover the full amount of your debt so they don’t need to.

Keep in mind the costs of end-of-life services, like a funeral service and burial, as well. These can run as much as $10,000 and be a real financial burden if you forget to plan for them yourself.

4. Add It All Up, and See What You Need

Now it’s time to determine how much total life insurance coverage you need. Here’s an example, based on the recommendation that you cover seven times your annual salary.

Sherry is a single mom of a four-year-old and a ten-year-old. She makes about $40,000 per year. If she passed away, her parents would care for the kids, and they’d need to move into a larger home to do so. She has about $25,000 in debt, outside of her mortgage, and she would want to fund both kids’ college funds with her life insurance. Here’s where she stands:

  • Income Replacement: $280,000
  • Additional Housing Costs: $50,000
  • Debt: $25,000
  • End of Life Expenses: $10,000
  • College Funds: $200,000
  • Total Life Insurance Needs: $565,000

That sounds like a lot, right? Before you decide you can’t afford insurance, though, take the next step.

5. Check Out Term Life Insurance Coverage

Over half a million dollars in life insurance coverage seems like a lot, but many people actually overestimate the actual costs of such insurance, especially for healthy, relatively young individuals.

The key is to get term insurance (unless you have a good reason to have more expensive whole life insurance coverage) for only as long as you need it. The longer your term, the more expensive your coverage. Sherry should probably have a 15-year policy, which would cover her until her children are both adults. And if Sherry is in good health, a policy like this could cost well under $50 per month. That’s much better, right?

Once you know how much coverage you need, it’s time to shop around. Plenty of online quoting systems can get you an estimate on your costs in just a few minutes.

These steps aren’t fun to think about. But having an affordable life insurance policy you know will protect your loved ones is worth a bit of discomfort. Check out our Personal Finance Learning Center to ensure you’re on the right track to keep your children safe and secure when you’re no longer here.

Image: Juanmonino

The post The 5 Things Single Parents Need to Consider about Life Insurance appeared first on Credit.com.

How Millennial Parents Can Improve Their Life Insurance

Life insurance startup Haven Life recently conducted a survey to see what millennial parents value most in terms of finances. Not on their agenda: life insurance.

With about 9,000 millennials becoming parents every day, it’s fair to ask, How are they doing so far? Life insurance startup Haven Life recently conducted a survey of parents with children ages 0 to 5 to better understand what this new generation prioritizes when it comes to raising their kids. (Full Disclosure: I’m the marketing and communications director for Haven Life.)

The findings paint a fascinating picture of parents who are invested in raising smart, compassionate children, but who are financially unprepared for their family’s future. We’ll look at three areas with room for improvement.

1. Saving for College

According to the study, only 13% of millennial parents identified college savings as one of their top child-related financial priorities. Maybe it’s because college seems so far off for their young children. Still, tax-saving programs can (and should) be taken advantage of now. Even an early, small contribution has the ability to compound and grow over time.

“By making college savings such a low priority, parents are missing out on the benefits of compounding investment returns from tax-advantaged programs like 529 Plans or even minimally aggressive investment accounts,” said Bobbi Rebell, author of How to Be a Financial Grownup. “That is more money potentially left on the table that isn’t being tapped.”

With the average total cost of a four-year public university degree expected to balloon to more than $205,000 by the year 2030, parents need as much time as possible to save if they plan to cover this expense.

2. Saving for Emergencies

Unforeseen expenses like car maintenance, home repairs or medical emergencies can be costly. If you’re not financially prepared, the effects can result in high-interest debt. (You can see how your debt is affecting your credit by viewing two of your scores for free on Credit.com.)

About 53% of millennial parents have $5,000 or less in savings, and 34% have $1,000 or less. According to AAA, the average car repair bill is between $500 and $600, so a high-end repair could deplete a savings account almost instantly.

One of the best ways to avoid this is by having a nest egg that serves as a backup plan for the unexpected. Most experts recommend building an emergency fund that can cover at least six months worth of expenses, and possibly more if you have several children. Budgeting services like Mint and You Need a Budget can help identify opportunities to free up more cash for emergency savings.

3. Life Insurance

If the risk of a sudden and significant emergency isn’t scary enough, consider this: Few emergencies are costlier or more unpredictable than death. A recent Parting.com article indicated that a funeral and related burial services for the average family can cost between $8,000 and $10,000. And that’s on top of the mortgage, child care, debt repayments and other expenses survivors might have to pay.

Haven Life’s study found that just 15% of millennial parents consider life insurance a financial priority. Of those who have life insurance, 70% have less than $250,000 in life insurance, and 20% have none at all. With an average household income of about $81,000, the majority of millennial parents surveyed were underinsured.

Life insurance needs vary from family to family, but typically experts recommend coverage that’s at least five to 10 times your annual salary. An online life insurance calculator can help you determine what the right amount of coverage looks like for your family.

Stay-at-home parents should consider obtaining life insurance as well. While they don’t technically take home a salary, it’s estimated that the work they do accomplish can equate to an annual salary of $113,000.

If providing a comfortable upbringing is a primary concern, a life insurance policy is virtually a necessity to help protect loved ones. The proceeds of a life insurance policy can help your spouse or the guardian of your children cover day-to-day bills, future schooling expenses, child care, debts you leave behind and more. (You can learn how much debt is too much by going here.)

Millennial Parents Have Good Intentions but Need Financial Discipline

Haven Life’s survey shows millennial parents have good intentions when it comes to raising their children. They dedicate the majority of their time and resources to raising kind, well-rounded little ones.

College savings, emergency savings and life insurance coverage are three important components of a financial plan that helps provide stability in children’s lives. Without improvement in those areas, parents risk falling short on what most consider to be the ultimate goal: to provide their children with more — more education, more money, more love and more time.

Image: Lacheev

The post How Millennial Parents Can Improve Their Life Insurance appeared first on Credit.com.

5 Ways to Leave a Legacy With Your Life Insurance

A life insurance policy can change many different people’s lives, or even entire communities, after you’re gone.

Ask someone if they want to leave a legacy after they’re gone, and they’ll almost assuredly answer yes. Ask someone if they know how to go about accomplishing such a benevolent task, and they’ll probably say, “I have no idea.”

You might be surprised to learn there’s a simple solution: your life insurance policy.

The payout from a life insurance policy (called a death benefit) can be a legacy that far outlasts your time on Earth. And it’s not only for people who want to leave a legacy to their spouse and children.

So if you think life insurance isn’t for your particular situation, think again. A life insurance policy can change many different people’s lives, or even entire communities, after you’re gone.

1. Care for Your Immediate Family First

The greatest legacy you have is your family. And life insurance can help financially protect the people you love most from the unexpected. If you have people who rely on your income for their day-to-day lives, they’re the first people you should consider when deciding if life insurance is for you and how much coverage you need.

Your legacy can live on through a death benefit that can help pay off the family home, fund college educations and provide income that helps them continue to meet their financial needs if you’re no longer there.

2. Cement Yourself as the Cool Aunt or Uncle

Your nieces and nephews probably don’t need a life insurance policy from you to ensure their day-to-day financial needs are covered. Most likely, they are covered through their parents’ life insurance.

But naming your niece or nephew as a beneficiary of your life insurance policy is a profoundly sweet move that would cement you as the cool aunt or uncle.

Leaving nieces and nephews a nest egg could continue your legacy long after you’re gone. Life insurance proceeds can help you fund that backpacking trip through Europe or contribute to their college tuition as you always intended to do.

There are many uses for life insurance that could help your extended family, which should be considered if you always planned to do so. Just make sure that you have a conversation with your brother or sister to give them a heads up, set expectations and allow them to factor the money into their family’s overall financial plans.

3. Leave a Legacy to Your Favorite Charity

With the recent election, many social media newsfeeds have been full of photos showing friends and family marching, volunteering, donating and giving back to organizations and movements they are passionate about.

If this resonates with you as well, perhaps your legacy should be giving back to your favorite organizations. Life insurance can offer a way to ensure if you’re no longer around to donate or volunteer, you can still continue giving back and advocating for what you believe in.

One of the simplest ways to give back to a charity via life insurance is to name a trust as the beneficiary of your life insurance policy. Make sure the trust has specific instructions to give a certain amount of your estate to the charity if you were to die.

4. Set Up a College Scholarship in Your Name

Another way to use your life insurance payout in an altruistic fashion is to establish a scholarship at your alma mater. A scholarship is a profound way to have your legacy, and name, live on after you are gone.

Each college has different rules and guidelines for establishing scholarships. You should contact your chosen college’s development or advancement office for help with this. Typically, you need $25,000 or more to be able to endow a scholarship at a university. The college or university will usually invest the $25,000 with their current endowment pool and issue a $1,000 scholarship yearly based on the criteria you and the college establish.

Similar to donating a portion of your life insurance benefit to a charity, it’s simplest to name a trust as your beneficiary and ensure the trust has specific instructions for the donation. You can leave instructions in your will to set up a trust or foundation, but you run the risk of your heirs misinterpreting your intent. An estate attorney can help you set up a 501(c)(3) charity, foundation or trust to help establish, fund and award the scholarships.

5. Build a City Park or Playground

Love your city? Consider leaving a legacy by creating a small park or playground. You’ll typically need to check with your city council on proposed locations and projects. The council can be an excellent help in determining the city’s need, recommending parcels of land if you don’t already have some to donate, and helping to guide you through how to make a difference.

Communities are almost always in need of a safe place for children to play. But they often lack the funds to build the playground and then maintain it. Through a trust, you can allocate a certain amount of money to create a better environment for your community.

Leave a Lasting Legacy

Many of us dream of leaving an impact on our loved ones and communities that will carry on long after we’re gone. Aside from financially protecting your family, directing a life insurance payout for altruistic means is a surefire way to leave a legacy far beyond your years.

If you’re interested in alternative ways of using life insurance to give back long after you’re gone, it’s a good idea to consult an estate attorney who can help you make the best choice for your specific situation.

Image: Juanmonino

The post 5 Ways to Leave a Legacy With Your Life Insurance appeared first on Credit.com.

Term vs Whole Life Insurance

If you’re shopping for life insurance, there are two main types you’ll likely encounter: term life insurance and whole life insurance.

Depending on who you talk to, you’ll hear different arguments for and against both types, which can make it difficult to figure out which type of life insurance will provide the right protection for you and your family.

This guide breaks it all down so that you can make the best decision for your specific situation.

What Is the Purpose of Life Insurance?

Before getting into the debate over term versus whole life insurance, let’s take a step back and remind ourselves why life insurance is important to begin with.

While there are some rare exceptions, life insurance primarily serves one main purpose: to provide financial protection to people who are financially dependent upon you.

In other words, life insurance makes sure that there will always be money available for the people who depend on you financially, even if you’re no longer there to provide for them.

A good example of this is a couple with young children. A toddler obviously cannot support herself financially, and life insurance makes sure that there would be financial resources to care for her no matter what happens to the parents.

Other examples of financial dependents might include a spouse who would struggle to handle all the bills on his or her own, or parents who have co-signed for your student loans.

So before you start thinking about which type of life insurance you need, ask yourself the following two questions to better understand why you’re getting life insurance at all:

  1. Is there anyone who would struggle financially without your support? If not, you probably don’t need life insurance.
  2. If so, for how long will they be dependent upon you? Is it a fixed time period or is it relatively permanent?

Your answers to those questions will help you sort through the term versus whole life insurance debate with a clearer, more personal viewpoint.

The Basics of Term Life Insurance

Term life insurance is coverage that lasts for a set amount of time, typically 5-30 years. Once that period is up, the policy expires and your coverage ends.

That expiration may sound like a problem, but it’s actually similar to most other types of insurance. Things like auto insurance and homeowners insurance are typically annual policies that have to be renewed each year, and you would cancel your coverage if you no longer had a need. Similarly, term life insurance is meant to provide coverage only for as long as you actually need it.

Let’s look at the pros and cons.

The Benefits of Term Life Insurance

It’s Inexpensive

Term life insurance is typically the most cost-effective way to get the protection you need. In fact, it’s often 10 times less expensive than whole life insurance for the same amount of coverage, especially if you’re relatively young and healthy.

The main reason for the price difference is that term life insurance eventually expires, meaning it has a smaller chance of paying out. And again, that may look like a downside, but…

The Coverage Period Lines Up with Your Need

Most people only have a temporary need for life insurance. Your kids will eventually grow up and be self-sufficient. Your spouse can eventually rely on retirement savings and Social Security income. Your joint debt will eventually be paid off.

Term life insurance provides financial protection for the amount of time that you need it and no more. You should hope it doesn’t pay out, because that just means that you didn’t die early. Like your car insurance, it’s good to have in case of an emergency, but the best case scenario is never having to file a claim.

In addition, if for some reason your situation changes and you no longer need life insurance, you can simply cancel your term life insurance policy and be done with it. Again, it’s coverage for as long as you need it and no more.

It’s Easy to Shop Around

Term life insurance policies are fairly simple and therefore pretty generic. As long as you’re looking at insurance companies with a strong financial rating, you can largely shop on price alone.

My two favorite sites for comparison shopping for term life insurance policies are PolicyGenius and Term4Sale, both of which only list policies from reputable companies.

For example, using the Term4Sale quote engine, a 34-year-old nonsmoking male in New York City with “Preferred” health status could get a $1 million 30-year term life insurance policy for as little as $939.98 per year or as much as $1,255.30 per year. And again, because term life insurance is fairly generic, you can compare those premiums with the confidence that your policy would be just as good either way.

You Can Typically Convert to Whole Life

What happens if you end up needing life insurance coverage longer than you originally thought? Since term life insurance eventually runs out, wouldn’t that be a problem?

It is a risk, but most term life insurance policies allow you to convert your policy to whole life insurance without medical underwriting as long as you do it before the policy expires. Your premium would increase significantly upon such a conversion, reflecting the increased liability the insurance company is taking on by providing permanent coverage. And if for some reason your policy did require medical underwriting at the time of conversion, there would be the risk of an even bigger premium increase if your health has declined since you originally got the policy.

Not all policies have this conversion feature, but those that do remove the risk that you wouldn’t be able to get permanent coverage later on if you need it.

The Downsides of Term Life Insurance

It’s More Expensive as You Get Older

Term life insurance is typically inexpensive if you’re relatively young, but it gets more expensive as you get older, especially if you’re looking at policies with longer terms. And the reason is simply that your odds of dying increase as you age, which means the insurance company faces a bigger risk.

For example, a 54-year-old male looking for the same $1 million, 30-year term life insurance policy we mentioned above is looking at an annual premium of $5,894 to $6,780 per year.

If you’re in your 50s or above and looking for life insurance, a term policy may or may not end up being a cost-effective way to get it.

It May Not Last as Long as You Need

Life is hard to predict, and it’s certainly possible that you end up needing life insurance for longer than you originally expected. If that happens, your term life insurance policy likely won’t have a lot of flexibility that allows you to extend it, beyond converting it to whole life.

There are also some insurance needs for which permanent protection is simply better. Those are rare, but we’ll talk about them below.

The Basics of Whole Life Insurance

Whole life insurance has two primary features:

  1. It provides permanent coverage, meaning that it will never expire as long as you continue to pay the premiums.
  2. It includes a savings component that builds up over time and can eventually be used for a variety of purposes.

There are several types of whole life insurance that have slightly different features and serve different purposes, like universal life insurance, variable life insurance, and equity-indexed life insurance. For the purposes of this article we’ll focus on the basic whole life insurance that most people will come across, and for the most part, all of the following pros and cons would apply no matter which type you’re talking about.

The Benefits of Whole Life Insurance

It Can Handle a Permanent Need

If you have a permanent or indefinite need for life insurance, whole life insurance is the way to get it.

For example, if you have a child with special needs who will likely be dependent upon others for his or her entire life, whole life insurance may make sense. Or if you will have multiple millions of dollars to pass on to your heirs, whole life insurance can help with estate taxes and preserve your family’s wealth.

Most people don’t have these kinds of permanent needs, but if you do, then whole life insurance can be valuable.

It Can Be a Form of Forced Savings

For people who struggle to consistently save money, whole life insurance can be a way to force yourself to build long-term savings while also providing financial protection.

It may not be the most efficient savings account, as we’ll talk about below, but having some savings is better than having none, and the savings you do accumulate can be withdrawn for any reason. Taxes are also deferred while the money is inside the account, which can be a benefit for high-income earners who have already maxed out their other tax-advantaged savings accounts.

It’s Can Be Structured to Meet Your Goals

If you work with a life insurance professional who really knows what they’re doing, you can specially structure a whole life insurance policy to serve specific purposes.

For example, if your main goal is permanent life insurance protection, you can structure it to minimize the savings component and make that protection as cheap as possible. If your main goal is to build savings, you can structure it to minimize other costs and front-load your contributions to grow your savings as quickly as possible.

If you can find a life insurance agent who’s willing to work with you in a fiduciary capacity, meaning they put your interests ahead of their own, you can get fairly creative and structure your whole life insurance policy to meet your specific needs.

The Downsides of Whole Life Insurance

It’s Expensive

Whole life insurance is an expensive way to get the financial protection you need. For example, remember the 34-year-old male who would pay $939.98 per year for a $1 million 30-year term life insurance policy? According to LLIS, a team of independent insurance advisers, a $1 million whole life insurance policy for the same individual would be $11,240 per year. That’s 12 times more expensive for the same amount of coverage. (Though, to be fair, for a longer coverage period.)

There are also a lot of hidden fees that add to the cost, from the sizable commission paid to the agent who sells you the policy to the management fees associated with the policy’s savings account.

Unless you truly have a permanent need for coverage, whole life insurance is probably not the most cost-effective way to get it.

Most People Don’t Have a Permanent Need

The simple fact is that most people don’t have a need for permanent life insurance coverage. As your children age and your savings grow, the financial impact of your death decreases until there’s little to no risk.

It might be nice to know that whole life insurance will eventually pay out, but is that something you need? And if not, is it worth paying those big premiums over all those years instead of putting that money elsewhere?

Don’t be fooled into thinking that your insurance has to pay out for it to be valuable. If you don’t have the need for permanent coverage, you shouldn’t pay for it.

It’s Not an Efficient Savings Vehicle

The savings component of whole life insurance might sound attractive, but the truth is that it’s not an especially efficient way to save money.

It takes a long time for the cash value to build up. It’s often 7-10 years just to break even, and even over long periods of time in the best of circumstances the return is likely to be low.

Not only that, but withdrawals from your account are actually loans, meaning you’re typically charged interest for the right to use your own money. Can you imagine if your savings account at the bank charged you interest each time you took money out?

Finally, unlike other savings accounts where you can simply decide to pause or decrease your contributions for a while if you hit a rough patch, your whole life insurance premiums are due like clockwork no matter what. Your policy can lapse if you fail to pay your premiums, losing you both the protection you need and the savings you’ve built up.

The truth is that unless you’ve already maxed out all your other tax-advantaged savings accounts — like your 401(k), IRAs, health savings accounts, and 529 accounts — the tax benefits of saving within a life insurance policy likely aren’t worth it. And even then you may be better off using a taxable brokerage account, depending on your specific goals and circumstances.

Which Type of Life Insurance Is Right for You?

If you’re purely looking for the financial protection that life insurance provides, and if your need is temporary, then term life insurance is likely the best option for you. It’s the cheapest way to get the protection you need, leaving more room in your budget for your other goals and obligations.

And for most people, quite honestly, that’s the end of the discussion. Most people don’t have a need for permanent coverage and will be better off putting their savings elsewhere, like regular savings accounts for short-term needs and dedicated retirement accounts for long-term investments.

But there are a few situations in which some kind of whole life insurance can make sense.

If you have a truly permanent need for life insurance, such as a child with long-term special needs, then a whole life insurance policy specially designed to provide the protection you need at the lowest cost possible may be well worth it.

And if your income is very high and you’re already maxing out all other tax-advantaged investment accounts, a whole life insurance policy can be a way to get some additional tax-deferred savings. Again, you’d ideally want it to be specially designed to minimize fees and maximize the amount that goes toward savings.

In any case, remember to focus on the reason why you’re getting life insurance in the first place and to make decisions around that need. The right type of life insurance will likely be pretty clear as long as you keep your personal goals at the forefront.

The post Term vs Whole Life Insurance appeared first on MagnifyMoney.

4 Steps to Take Before You Buy Life Insurance

Here are four helpful tips for selecting the right life insurance policy.

Americans treat life insurance the same way they treat retirement. The vast majority know they’re not adequately prepared, yet don’t always take steps to change.

A 2015 study conducted by the nonprofit Life Happens and LIMRA (a life insurance market research firm) explains this phenomenon in vivid detail. The 2015 Life Insurance Barometer, which polled 2,032 adults, showed nearly one third of Americans believe they need more life insurance than they have. Further, 43% of Americans said they would feel the financial impact of losing their primary wage earner within six months of his or her death.

Astonishingly, 54% of those polled said it was unlikely they would buy more life insurance coverage within the next 12 months. The reason? According to LIMRA, many consumers tend to overestimate the price of life insurance, along with the difficulties of obtaining coverage.

“In addition to believing life insurance is too expensive, our research has shown that consumers are intimidated by the process of buying life insurance — 4 in 10 don’t know how much they need or what to buy,” said Todd A. Silverhart, corporate vice president and director of LIMRA Insurance Research. “Having a better understanding about the factors that influence pricing might help consumers feel more confident and encourage them to pursue getting coverage they believe they need.”

What You Can Do

Like anything else, the key to finding and obtaining the ideal life insurance policy (or policies) is educating yourself on the ins and outs of this coverage. Knowing how policies work and how much they cost is one of the first steps toward protecting your family in the event of your death.

If you’re one of the millions who know you don’t have enough life insurance coverage, here are some steps to take today:

1. Assess Your Risk and Be Specific

Bismarck, North Dakota, financial advisor Benjamin Brandt suggests taking a look at your lifestyle to see which risks you’re trying to hedge against. Do you have unfunded retirement needs? Young children? Mortgage debt? (You can see where your finances stand by viewing two of your free credit scores on Credit.com.)

“If your risks have a specific beginning and ending, consider term life insurance,” says Brandt. Because term life insurance offers coverage for a predetermined length of time, you can customize your policy so it covers a stretch of time when you need it the most. If you plan to retire in just 15 years, for example, you may be fine with a 15-year term life insurance policy that would replace your income if you died.

Whole life insurance provides lifelong life insurance coverage with cash value you can borrow against, but at a more significant cost. Before you buy any policy, you should make sure you understand the difference, how long your coverage will remain in place, and how each type of life insurance might work in your favor.

2. Determine How Much Income You Need to Replace

It’s tempting to try to use a simple formula to determine how much coverage you need. Although you might hear that four times your annual income is a good rule of thumb, this is not enough coverage for most people.

North Carolina financial advisor Peter Huminski of Thorium Wealth Management offers this trick to come up with a smarter amount.

“Multiply your annual income by seven to 10 years,” says Huminski. “The more debt you have or the more responsibilities you hope to cover (such as young children’s needs, for example), the more years you should use for this formula.”

If you earn $100,000 per year, for example, you could estimate you need $1 million in coverage as an absolute minimum.

3. Take a Close Look at Your Liabilities

“The number one reason that people give for purchasing life insurance is to provide income for their family in case of death of the primary income earner,” says financial advisor David G. Niggel of Key Wealth Partners in Lancaster, Pennsylvania.

However, many people fail to look beyond what they earn to what they actually owe.
For example, you might think you need $50,000 in life insurance coverage to replace your salary for the next 20 years — or a $1 million dollar policy. But if you have a $200,000 mortgage, $100,000 in student loan debt, and kids nearing college themselves, you need a whole lot more.

“In order to calculate a minimum amount, you will need to know your income, mortgage balances, debts (such as credit card, auto loans, student loans) and future college tuition expenses,” says Niggel. “This calculation will give you a good starting number that you can discuss with your financial advisor and make any adjustments necessary to fulfill your goals and family wishes.”

4. Shop Around

Just because your college buddy sells life insurance doesn’t mean he should be your first and only contact. Because of the many ways life insurance firms price their individual policies, you could pay considerably more if you don’t shop around.

“Consider working with an independent insurance professional or finding a quote engine online,” says Minnesota financial advisor Jamie Pomeroy. “They will help you look at dozens of different insurance companies and help you determine which company offers the least expensive quote with the highest rated company — and one that has a clear underwriting process.”

This simple act of shopping the life insurance market can potentially save you lots of money in lower premiums over the long haul, says Pomeroy. And due to the wonders of the internet, you can conduct plenty of price comparisons without even leaving your home.

Final Thoughts

Buying life insurance isn’t rocket science, but it does require some work. Not only do you need to analyze your family’s needs, you must compare policies and shop around for the best deal.

Also know that certain factors such as your health and your credit may affect your premiums — and even prevent you from buying coverage. Just like you can’t buy homeowner’s insurance once your house is already on fire, you may not get the life insurance policy you want if you’re chronically ill or have lifestyle factors that might lead to early death.

Either way, the only way to know where you stand is to figure out what you need, shop around and fill out a life insurance application once you’re ready. With good health and credit, you may qualify for an inexpensive life insurance policy that could help you sleep better at night.

The author has an insurance license and has relationships with multiple insurance companies. However, these relationships do not result in any preferential editorial treatment.

Image: eyetoeyePIX

The post 4 Steps to Take Before You Buy Life Insurance appeared first on Credit.com.

4 Reasons to Have Your Own Life Insurance, Even if it’s Already an Employee Benefit

Finances

If you work for a company that offers life insurance through a group policy, you may be surprised to find out that there are good reasons to consider getting additional coverage.

Before discussing why you may need additional coverage it’s really important to understand why you need coverage at all. The purpose of life insurance is to protect people who depend on you financially when you die. With adequate coverage, when you die, you can be sure that the people who depend on you have enough money.

According to LIMRA, more than 70 million people know and admit they need more life insurance in the United States. Yet, they aren’t making it a priority.

The scariest part about this is that you jeopardize the financial lives of the people you love the most when you have inadequate coverage.

Consider life insurance planning as part of your overall financial plan and make it a priority. This includes know the reasons why your employer coverage may not be the only coverage you need.

Reason 1: Your Employer’s Coverage May Be Inadequate

Your group life insurance coverage may not provide a large enough death benefits for your dependents when you die.

For example, if your coverage pays out a $50,000 death benefit, and your family would need $1,000,000 to live off without you, then your employer plan would be inadequate and you would need additional coverage.

Understanding how much insurance you need is crucial to knowing how much additional coverage to purchase. There are several approaches to determining how much life insurance you need, so it’s important to talk with a professional to know what’s best for you given your specific family circumstances. Some professionals use an old school model where the rule of “10 times your income” is how much life insurance you should have. Beyond general rules that you can find online, a professional will be able to tell you how much life insurance you need, given your specific circumstances.

Your coverage may fall short in other areas in addition to the death benefit, too. For example, you may want riders on your life insurance plan that you can’t add with an employer plan.

The customization of an employer plan is limited compared to life insurance you can buy on the open market. For this reason, you may find your life insurance coverage through your employer inadequate.

Reason 2: You May be Able to Get a Better Deal Somewhere Else

Your employer provided life insurance coverage may not the best financial decision for you. You may be able to find a better deal by shopping for life insurance through an insurance broker. Not only can you price shop, but you can shop for insurance that fits your needs.

Shopping for a good deal on life insurance now is important. If you wait until you switch jobs, you are giving up time that could work in your favor. For example, if you change jobs in five years, you will likely pay a higher rate for life insurance (assuming you’re in the same health, which is also a risk) than if you got the life insurance policy earlier. Locking in a price now will help you get the best deal you can, regardless of your job status.

Reason 3: Your Insurance is Dependent on Your Job

With employer group life insurance, the coverage only exists so long as you are an employee. If you quit, are laid of, or are fired, you most likely lose your life insurance coverage.

The average employee works at his job for 4.6 years according to the Bureau of Labor Statistics. This means that most people are changing jobs a lot. With each job change, benefits end – life insurance coverage included.

While you may think you can always get life insurance with your next employer, your next employer may not offer life insurance or some other turn of events may happen in your life where you don’t have access to employer life insurance coverage.

Reason 4: If Your Health Changes You Put Your Coverage at Risk

If you get sick or become disabled you put your life insurance coverage at risk. Getting an illness may cause you to have to leave your job, which means you may lose your benefits, including your life insurance coverage. In this case, as opposed to quitting or being fired, your ability to get life insurance somewhere else may be very difficult because it’s hard to get life insurance (if not impossible) in poor health. Life insurance is easiest and cheapest to get the younger and healthier you are.

For example, if you are the sole provider for your family, become disabled, have to leave your job, and die a few years later, you would leave your family without life insurance money after you passed away if you only had employer life insurance coverage because of the years where you lived disabled and unemployed. If you had additional life insurance coverage in place before you became disabled, your loved ones would receive a death benefit regardless of whether you worked in the last years of your life. This is a really important reason to consider shopping for life insurance above and beyond your employer group coverage.

Shopping Young Makes Sense

Life insurance is easiest and cheapest to obtain when you are your youngest and healthiest self. Therefore, it’s really important that you consider your health and your age when you decide how to meet your life insurance needs.

You need life insurance if you have people who would financially suffer if you died. The purpose of life insurance is to protect your loved ones financially when you’re no longer here. With adequate life insurance coverage you can have confidence that the people who depend on you will have enough money to live without your support.

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