Can someone tell me about life insurance?

In My Humble Opinion
1

As in, what kind, how much, etc.?

About me: I’m 35 and female and I live in Ohio. My only dependent is my husband. He is disabled and collects Social Security.

I am an heir to a rather large trust fund, but I do not get that money unless my mother dies. If I die before my mother, my husband gets nothing, unless my mother were to give him something in her will. (Possible, but I’m not counting on it.)

We’ve been so far in debt because of his medical bills, that we haven’t been able to save much. But I got a raise and things are looking better financially. We have a house and a 401k plan that currently would pay off the house and nothing more.

I guess the question is, should I be looking at getting a rather large life insurance policy? I have a $10,000 policy that comes with my health insurance. I was considering something a lot more substantial.

Does it makes sense? Do the longer terms make more sense, or the shorter terms? Where to shop?

Please tell me anything you know and think I should know about life insurance.

2

Here’s an excellent site to begin with:
http://www.fool.com/insurancecenter/life/life06.htm

3

A 401k is an invesment pension plan thing, right? When can you vest the 401k money?

Are you using the death benefit on that to cover your outstanding mortage? If you are, you are likely paying far too much, and you are needlessly reducing (big time) the long-term value of your investment. Try to seperate it out - life insurance is a commodity product, and you should be able to get it cheaper no matter the status of your husband.

I know I’m in the UK, but I’ve worked in the life industry on occasion at corporate
finance levels, and the US industry as it currently stands is much like ours fifteen years ago. Ask your company or broker for a comparison of the growth of your investment at an arbitrary rate with and without all their charges - demand that they include all spreads and investment fees.

4

Thanks for that link. Very helpful.

I am 100% vested in the plan, but I don’t have much money in it yet.

No, I just meant that there might be enough in my account to cover the mortgage if I die.

I wish I understood that, but I’m afraid I don’t. Can you explain in itty bitty words for the financially impaired? :smiley:

5

This can be a very complex subject, but let’s look at it this way.
Your husband is disabled. Since you said he is collecting SS, I will assume that the chances of him going to work are slim and none.
You are the sole support of the family except for his SS.
I will assume that he could not live on his SS alone.
You want to supplement the SS income with life insurance.
Right so far?
So now you need to determine how much and of what kind of insurance you need.

Let’s take the amount first. The question you have to answer is how much do you want to supplement his income by? Just for the sake of discussion let’s say $10,000 per year.

Now comes the real kicker, for how long do you want to supply this income? For a set number of years or for his lifetime? Is there any chance of children in your future? Let’s assume 20 years and lifetime.

The final question is what interest rate are we going to assume that your life insurance money will earn after taxes during the payments. A 10% return is not realistic (makes the numbers look great though) Again for the sake of discussion let’s assume 4% net return after taxes.
looking here we find a table for how much money needs to be put away today to generate $1/year for however many years.
Again assuming 4% and 20 years of payments, $1/ year will cost you $13.007936. so doing some quick multiplication a $10,000/year payment for 20 years requires $130,000.

But wait you say, if I die tomorrow, my husband will be out of money when he is 55 (assuming you are both the same age). The answer is of course is you are correct. There are two ways around this. You buy enough insurance to generate $10,000 worth of interest every year at your assumed interest rate.
(Amount of insurance Called I)(.04) = 10,000
I= 10,000/.04 = 250,000. So if you buy $250,000 of life insurance you can supply your husband with $10,000 in perpetuity. If there may be kids in your future, the money can be left to them when your husband dies.

But wait you say, no kids, and a quarter of a mill is a metric buttload of insurance, isn’t there another way? Why yes there is. The insurance company’s offers a settlement option called an annuity. An annuity is the insurance company promise that in return for a lump sum they will provide a lifetime income to your husband. This income will be a combination of principal and interest. Since it is guaranteed to last as long as your husband does, it will cost more than a 20 year series of payments, but because it uses both principal and interest, it will cost less than using interest only. The value of the payment will also vary with your husband’s age at the start of the contract.
But wait what happens to the balance of the money if my husband dies of a broken heart 6 months after I die? Well what do you want to have happen? You can set up the annuity several different ways, life only (payments end when he dies), a guarantee of 5 years of payments, 10 years, a guarantee of the the principal will be payed out. In general the longer the payment guarantee, the lower monthly income.

So how much will it cost to supply my husband an annuity of $10,000? I don’t know, you need to take to a life insurance agent, and get some numbers from them. May I suggest that when you go looking for an agent, you look for a Chartered Life Underwriter (CLU). A CLU is to the life insurance industry what a CPA is to accounting. not a guarantee, but this guy has been around for several years, and taken and passed a serious course of study.

OK, I have an idea of how much insurance I want to buy, what kind should I buy? There are more kinds of life insurance that you can shake a stick at, but in total they boil down to permanent and term. Permanent insurance will build cash values and in general the premium will never go up (although there are some hybrid products out there). After a number of years if you stop paying, there will be a cash surrender value. Term insurance on the other hand is like car insurance. You buy the policy. If you die during the term, it pays. If you live you get to pay another premium. No cash value is built up, and sooner or later your premium will go up. On some policies it will go up every year, others every 5 or 10. For you situation, I suggest that you buy term life insurance. Term insurance rates have drooped through the floor over the last 20 years.
Some people may suggest that you consider declining term insurance. That is a policy that has a decreasing death benefit. I do not suggest this. While it is true that every year you live is one less year you husband will need the proceeds from the insurance, this is offset by the rising cost of living. I can tell you this, I have more insurance now than I did when my kids were little.
I hope this helps understand life insurance. If you have any further questions, feel free to ask.
Rick

6

Rick, thank you for that post. So helpful!

Precisely right. In fact, his SS income only covers his medications.

No chance of children. But I do have the possibility of inheriting that trust that I mentioned in the OP. I think that would mean that a term plan would be by far the more rational choice.

Also, my husband’s health is precarious at times, so I would have a tough time figuring out how many years to plan on. He’s 45. He’s had doctors tell him that he has days to live. He’s had others who think he’s doing well. Gah.

Does all insurance pay out annually?

Will it also vary with his health at the start of the contract?

It helps enormously. Thanks.

The link AR Cane gave said that they recommend policies that can be renewed without another medical checkup. Do you consider things like that dealbreakers?

7

No prob, glad to help

Actually the company is more than happy to write a check for the full amount. They also offer various settlement options such as annuities. If you die and you husband takes a check and is going to live on the money, he will probably invest it in a bank /savings and loan/ bonds/ mutual fund that will generate interest. If he just puts a pile of money in a mattress, no it won’t generate any interest. By utilizing interest earnings, it lowers the amount of money needed up front to supply the income.

It may, but I don’t think so, check with an insurance professional.

I think that a guaranteed renewable contract is very important. At some point in your life you will become uninsurable. Or you may become insurable only at a much higher than normal rate. You do not want to be shopping for life insurance after either or those two things occur. If you buy a term policy that is guaranteed renewable to age 65 say, no matter what your health is the company has to keep you. While I hope you stay insurable up till the day you die at a ripe old age, the reality is you might have a heart attack next year.

Oh one last thing, There is an ad on TV right now for J. G. Wentworth which is a company that will buy a person out of a structured settlement. These people are vultures IMHO, and are scum. Please tell your husband that if he ever calls them after you die, you will come back and haunt him.

8

jsgoddess
It sounds like you need to educate yourself on money matters in general.
I’d strongly advise that you go to your local library and get a few books on basic investing and money management. There’s a book called "Sylvia Porter’s Money Book’ and while it’s a couple of decades old, the basics don’t change and it’s written for people who hate to read about such things. I’m sure you will find other good books as well. The more you know, the further you can make your insurance and investment dollars go and the less likely you are to get yourself involved in some bad policy or investment. There are a lot of scams and bad buys out there, they favor the companies selling them at your expense.
You can get a policy that’s tied to an annuity to pay installments to your husband, but remember that’s a service and they don’t provide services for free.
You can do the same thing for yourself, by having the policy pay into a trust, but you have to do some homework to understand how things work, what to look for and what to look out for.
At 35, if your in good health and a nonsmoker, you should be able to get a quarter million dollar term policy for around 30-40 dollars a month, higher amounts actually cost a bit less per thousand. Term insurance is the only way to go IMHO. Whole Life Policies, of which there are thousands of permutations, are, at best, forced saving plans and you pay dearly when you buy one. Some term policies will give a small discount if you pay the premiums annually, so while your educating yourself you could be putting aside a few bucks a month toward that goal.
As another example, you could have a trust that requires that your money be invested in an index fund (mutual fund), such as the S&P 500, the NASDQ 100, or the Wilshire 5000. These indices would offer some reasonable assurance that your money were securely invested and would provide an optimal return w/o excessive risk.
If this sounds like more gobbledegook it will become clear, very quickly, as you do some reading and you really do need to have an understanding of how money works if your going to make intelligent choices.
It’s not as difficult as it may sound, honest, and you’re likely to get really interested once you start to learn. :wink:

9

Very nice summary. I sold insurance for a few years. Horrible job. But whenever I met with someone who wanted to know how it worked, my explanation was similar.

In terms of the amount of insurance, I always asked **“How long do you plan to be dead?” ** Got their attention and got their focus on the reason for insurance - the care and feeding of their survivors.

10

Life insurance is a gamble. You bet you will die.they bet you will live. At least long enough to be profitable. You pay for the bet.

11

Term life insurance is cheap if you are in generally good health and under 40. My husband and I both have pretty high policies for something like $20 a month each. If your husband depends on your income to survive it’s an easy choice and a responsible one. I am assuming you are getting a policy on yourself and not your husband, if he has been told he only has days to live getting him a term policy would be almost impossible, and if you could find one it would cost a fortune. If you are in good health then finding one for yourself shouldn’t be hard. The insurance company doesn’t care about the health of the beneficiaries, just who the policy is for. If you died first and the policy paid to your husband, and then he dies, the money goes into your estate or whoever you have willed as the secondary beneficiary. You can decide how to divide it up on the policy or your will if you have one (also a good idea.) For example, I have a policy and if I die, the money all goes to my husband. If we both die, together in a plane crash for example, it goes to my parents and into a trust to be set up for our son, I think as part of our whole estate or whatever.

You can shop online for policies and price compare. Get term, not whole. Look for an agent that shops around for policies from different companies to get the best price, not one who works for only one agency. A general rule I have heard is to get 5-10 times your yearly income as your amount. So if you make $50,000 a year you want a policy somewhere between $250,000 and $500,000. You might want to talk to an agent about how much you need though, since that is generally the rule assuming that kids will grow up and self-provide, if you have someone like your husband who could live for years needing steady income you may need a higher policy. Eventually if you build up your own nest egg with 401K and investments then you can self-insure and then not buy another term policy when yours runs out.

12

Thanks.
Yeah, me too for 7 years when I was young. Both sales and management.
Hardest way in the world to make an easy buck.