Teach me about life insurance

Factual Questions
1

I want to take out a (term) life insurance policy on myself as soon as I’m able to afford it.

Here’s the deal: I want my husband to get a million bucks if something happens to me. I figure that would be more than enough for him to live on and raise our daughter, given that he’s smart with money.

I’m 26. I don’t smoke. My family’s pretty healthy so I don’t worry about hereditary diseases. I’m every insurance company’s dream customer, EXCEPT that I am overweight. I have lost 81 pounds and I work out regularly, but I’ve got another 119 pounds to go before I’m at goal. So my questions are:

  1. Would a company write me a policy now at my weight, or would they balk and tell me to come back after I drop another 50 pounds or so?

  2. Does anyone out there rank life insurance companies according to how good they are about not screwing over their customers? I don’t mind to buy a policy from some little-known corporation, but I would want to know that they have a stellar track record and probably won’t try to dick over my family in the event of my death.

  3. If I die and my husband gets a million bucks, will Uncle Sam hit him up for taxes? Or is stuff like that tax-free?

If you’ve had a good experience (or bad) with a company, please feel free to share it with me. I’m particularly interested if anyone has dealt with Nationwide. We have our car insurance with them and they’ve been great and I’m wondering if I should check them out first.

2

Well, I work at a life insurance firm right now so let me help you out.

Yes. Pretty much every company will write you a policy. Depending on the company and the plan you want, the rate might be higher but yes, you can get insured.

Frankly, there aren’t many little companies out there. Go with a large company like Unum, Met, First Colony or something. Get an agent, they will be able to help you with this stuff. All the large companies are about the same in terms of customer service. The major thing, since you’re pretty young, is “will this company still be in business when I die?” For that, you’ll want to look at COMDEX ratings and stuff, which measures each company’s financial health and the strength of their investments.

Yes. But you can do different things to reduce the cost. Talk with an attorney.

Now then, you’re going to want to need to know what kind of insurance you want. If you’re just looking at short term stuff, money in case of accidental death, then you may want to look at term insurance. These will give you a guaranteed rate for however long the term is. So a 10 year term would have guaranteed rates for 10 years. This is an advantage at your age since you’d get cheap rates, since the company could reasonably expect you to not die within the term. You’re a good bet, in other words.

Frankly, however, I would look at a whole life policy. Depending on the plan, you would get a guaranteed rate for your entire life. It’ll be more expensive in the short term than what you would get in say a term insurance policy, but when you started getting into your 50s, it would be a lot cheaper for you.

You’ll have to take an exam and stuff. And you may not be able to get $1 million in coverage, depending on your financial situation.

3

With regard to not having to pay so much in taxes, yes, talk to an attorney. (I am not one.) You will want to set a trust account for the money to go to, rather then just designating your husband as the sole beneficiary.
IIRC, it should be called “Irrevocable Trust for the benefit of SnoopyFan’s Husband” or something like that.
Talk to an estate attorney; he should know the best way to set this up.

4

I was 26 when I got life insurance - and I had to get a “rider” because of my weight. Not a big deal - it came out to be about $5 extra each month. The only bad thing was they sent a nurse to my office with scales to certify my weight. (At the time I was about 320 pounds.) Ask your insurance agent - if you would need a “rider” or not. At my size, I was just glad they covered me at all!

5

With regard to the Tax man getting a hunk of your “death benefit”

This is incorrect. Period. The tax man stays away from the death benefit of a life insurance policy. He may come a-knocking if you take cash out of your Whole Life or Universal Life policy, but this is a discussion for you to have with a life insurance AGENT. Advise toward Estate Planning to protect the proceeds of a life insurance policy is misguided. Life Insurance is used in Estate Planning as a tool to pay inheritance taxes (which I think GWB repealed a while back). The idea is you pay the tax bill with the NON TAXED (ahem) life insurance proceeds as opposed to liquidating part of the estate and giving it to the gubmint. All that said, you want to check the laws of your state to see if the proceeds of your life insurance policy will be subject to state or local income taxes. The Feds leave it alone, however.

Also incorrect is the statement, “Yes. Pretty much every company will write you a policy…you can get insured.” It is inappropriate to make such a statement despite the qualifier, “Depending on the company and the plan you want, the rate might be higher…” which is true. Point being, if an underwriter concludes that you are a bad(hard word, but you get my point) enough risk, the policy can be declined irrespective of the type and amount.

Getting a whole life policy now, given that you are overweight and still in the process of changing that condition, is also inappropriate. Your weight will almost certainly be reflected in the cost of the policy–why then buy the most expensive policy available until you have attained your target weight? (let me know if that needs clarification).

Now. My input. The need that you have stated (to cover expenses for raising your daughter) suggests that, yes, a term policy is in order. Decide how long this need is going to last (assuming you get hit by a bus the minute after you purchase the coverage) and buy a policy for that amount of time or a year or 4 longer.

A million bucks sounds excessive. From what I have seen, it is only mildly so. And quite affordable in a term policy (Have you considered rounding out the old man’s coverage to a million as well? just in case he gets eaten by a bear or something?). Consider getting a 1 or 5 year term policy for now (while you shed the weight) and once you qualify for standard or preferred rates you can go for the longer term–could save you some dough, talk to your LICENSED AGENT about options.

I could name 3 companies off the top of my head that, according to the rating agencies, will be willing, available and able to pay the death claim whenever the time comes. Doing so, I think, would be inappropriate in this forum. :smiley: But yes, these are valid concerns. Matchka Mutual can sell you the policy, you can pay it for 10 years, Matchka Mutual leaves the business and guess what? Your policy evaporates…and now you have breast cancer or something and are uninsurable. Something about creeks and paddles comes to mind.

Some Auto Insurance companies will offer a discount on the car insurance if you also have a life (or homeowner’s) policy with that company. Dunno about Nationwide.

6

I did life insurance for about a year and a half. This is how I understand it:

They’ll probably write it, but it will probably be rated up. If you keep off the weight for an extended period (ask the individual company how long), you can reapply and they’ll take off the weight rate. If nothing else has happened to your health, you’ll be at normal rates.

There are many companies that do that sort of thing. We always told people to look at the Weiss rating, because they use grades that you can understand. A “C” is not very good, just like American school, instead of using this wacky system with AAA grades, where “A” is actually fairly bad. I honestly think that system is designed to fool the average consumer. Plus, Weiss doesn’t make their money from the companies paying to get rated, so they’re more independent. You’ll have to pay $8 or something to ask Weiss for a rating, though.

I’ve always understood that life insurance payouts are tax free. Cite: Life Insurance Provides Tax-Free Security

"The first thing that struck my interest was the fact that life insurance proceeds go directly to your beneficiaries, isn’t held up as part of your estate, and it isn’t taxed. In short, your life insurance policy will benefit your family immediately, right when they’ll need it most!

Let me repeat the most interesting part of this equation: There is no income tax due on life insurance proceeds! This is in sharp contrast to estate taxes which can wipe out a huge chunk of your assets."

The thing to think about in regards to buying term vs. universal life is this: If you buy a 20 year policy, how mad are you going to be if your health has deteriorated and you can’t get a renewal at the end of the 20 years?

Term runs out and requires a whole new application to start again at the end. Your health will be evaluated at that time. UL will fix your health as now (or as when you’ve reapplied after having lost the weight and kept it off), and if you want to extend your coverage, you’ll only be charged for your advancing age, with your health not part of the equation.

7

I’m a big believer in term life over cash value (often called whole life or some other moniker) for the vast majority of people.

See what the Motley Fools have to say.

Comparison of the two here

and keep in mind…

There are other pages at the Fool’s website that go into what to look for in term insurance…Again, for the vast majority of people, it’s generally better (and easier) to buy term life. If you want an investment component, use another tool that will generally give you a better return (stocks etc…)

8

That’s a tired phrase, “Buy term and invest the difference”. We heart it all the time. It’s a false presumption. Insurance is not an investment.

I say again, the questions is, "How bad will it be if it turns out in 10-20 years you are uninsurable? With a term policy, you will be stuck. With a UL, you can extend your coverage with no new medical exam.

Stop thinking of the cash value of a UL as an investment. It’s only there to pay for your coverage when you’re older. Say you’re planning to keep this for 30 years (almost impossible with any term plan). You’re paying ahead now while you’re young. You don’t really cost the company $100 a month while you’re young. The difference goes into the cash value of the policy. Maybe 20 years from now you really do cost $100 a month. After that, you cost more, and the cash value is eaten to keep the payments level. Otherwise they’d go up every year.

Term also has you paying ahead (that’s the only way you can keep the payments level over decades), but you don’t get a cash value.

You can get whatever you want, but make an informed decision. Those investment people act as if percentage return is the only thing to ever consider. You have to consider how much you might want this insurance later.

9

Or not

I encourage folks to inform themselves as well. I have never heard from anyone who doesn’t have a self interest in the matter (i.e. works for the insurance industry) suggest a cash value plan over term for most people. To call the Motley Fools “investment people” is a bit short sighted. They give financial advice covering all areas of personal finance…they don’t have a financial stake in the decisions that you make.

If you don’t like the Motley Fools, howzabout the folks at CNN and Money magazine?

I’ll say it again…as a consumer who HAS looked into the matter, the vast majority of independent financial advisors (ones who DON’T have a financial stake in what insurance you choose) will recommend term life over some sort of cash value policy for the vast majority of situations.

10

The Smartmoney.com website has an overview of the different types of insurance…but again (as they say) it’s mostly term vs some sort of cash value plan.

And again, they say

And finally, there is some good info at insure.com about medical exams for life insurance.

11

Fixed link

12

Beagledave “I have never heard from anyone who doesn’t have a self interest in the matter (i.e. works for the insurance industry) suggest a cash value plan over term for most people.”

That’s because you never came to see me when I was selling the stuff. As an insurance guy I sold exactly 4 other-than-term policies. Those 4 were Universal Life and were well suited for the needs and plans of the customers who bought them (they also rejected the term policies I offered).

This talk about which policy type is better than the other, and comments about what motivates insurance salespeople is cynical and counter-productive to ignorance-fighting.

Cash Value insurance does have a relevant place in financial planning, and for certain needs (like those temporary needs stated in the OP) there is no correct decision other than term. The OP did not mention estate planning or final expenses; only (by inferrence) income/services replacement for the duration of her kid’s childhood.

13

Umm…huh?

I said that I have never hear a financial advisor who DOESN’T sell life insurance products suggest that cash value is better than term for most people.

I’m not sure what your story as a former insurance sales person means in terms of the above statement.

The cites I offered (saying that term is generally better than cash value) are from 3 independent financial advisory web sites.

Really? So the Motley Fools, Money magazine and Smart Money are not trying to educate consumers (read; “fight ignorance”)?

If I buy a car from a car salesman, wouldn’t it be a good idea for me to know “what motivates that car salesman”?

I never said that cash value had no place in financial planning. In certain situations (outlined by the Motley Fools, especially) it can be a useful tool. In most situations (you did see me use that qualifier, right? :wink: ), independent financial advisors think that term is better than cash value.

14

Cardinal, you are spouting your sales pitch to people who won’t be buying from you at any point in time, so you might as well admit to the fundamental flaw in your arguement in favor of whole life plans. Life insurance is meant to replace lost income. If you die when you’re 30, you have to replace 30 years of earnings with insurance. If you die when you’re 50, you only have to replace 10 years. A concrete example from the OP, in 20 years the kid will (hopefully) be raised.

So the extra paying that you’re doing early goes toward paying for something you don’t need later in life. Not a wise use of your money.

Term policies are also a good candidate for pyramiding, say take that million and get $400k in a 20 year term, and $300k in 10 and 5 year terms. (or as appropriate).

-lv

15

I am a licensed professional, but as the lawyers here would say, I am not your professional. I strongly believe that for a young person looking to insure their family a 20 or 30 year term life insurance policy is the best deal.

I would make some suggestions to the OP.

  1. Talk to someone or do some research to find the amount of coverage you actually need. An abritrary figure can be very far off the mark and you don’t want to be underinsured or overinsured.

  2. Think about the length of coverage you will need. Most people do not need permanent insurance. Life insurance is to protect your family, especially children in your prime earning years. Term insurance usually is bought with a guaranteed period over which you pay the same rate. You can usually choose up to thirty years.

  3. Use a highly rated insurance company. Term insurance is surprisingly simple, with very few exceptions (such as suicide in some instances) if you die, they pay. You don’t get a significantly lower rate by choosing a less financially secure insurer, so there is little reason to do so. You want to know that they will be there if you die twenty years from now.

  4. Do step one and two for both you and your husband. It is hard to imagine a situation where one party should be insured and the other shouldn’t.

  5. Talk to an insurance professional. Be very careful as you may be encouraged to buy a more expensive policy than you need. There simply isn’t much profit in your basic term policy. You can also use internet life insurance quote engines.

  6. I can state with absolute certainty that you are not taxed on the death benefit of an insurance policy.

Term insurance should be cheap. Even with a weight problem I don’t think you are looking at much more than $100 a month. Whole life and universal life can easily cost three to four times as much. This is something that most people need and I am glad you are doing it. Done right it should be cheap and fairly easy to get a policy underwritten.

16

beagledave, I’m not arguing against the position that Term is best for most situations. I took exception to the remark, “I have never heard from anyone who doesn’t have a self interest in the matter (i.e. works for the insurance industry) suggest a cash value plan over term for most people.” which, if I decoded it correctly, can be taken as “The only people who stand to make a buck selling insurance will suggest a CV policy.” The inferrence being “greed motivates the sale.” <<takes out bleeding heart and Kum-By-aa guitar>> and it seems to me that you are thus perpetuating a stereotype, and now <<in tears>> comparing the life insurance vendor to a smoke & mirrors used car salesman.

What motivates the insurance guy could just posibly be the welfare of his client.

My statement “This talk about which policy type is better than the other…” was improperly supported. What I meant was: neither is better, they are different animals with different purposes. Thus the discussion outside of a scenario (“which would be better in the case of…”) invites much general opinion which could be potentially misapplied by the casual observer who takes away the idea that Term rules and CV is sold by sharks. Said observer then goes and protects his estate with a term policy.

I hope that was a coherent explanation…I’m not disagreeing with The Fool, et al. Education about this stuff is a good thing.

17

Sorry you decoded it that way. I was saying that disinterested parties (which to me, means folks who DON’T sell insurance), who have knowledge about life insurance, generally recommend term. I’m a firm beliver in getting facts from disinterested parties, whether its buying life insurance, buying a car, or choosing between dish or cable.

I agree. And what motivates a car salesman could possibly be the welfare of his client. However, isn’t it a good idea to understand the financial incentives that might be at play in how the car salesman treats you?

Well the Motley Fools link I provided (which I hoped you looked at) specifically had a section titled “Some reasons to consider cash value life insurance” which included “Tax-efficient estate planning” and three other reasons.

For most people in most situations, term is the only real option that makes sense. For a “relatively” small minority of all life insurance policy holders, a cash value plan may be useful. I’m not saying that insurance salesman Joe is an evil person, I AM pointing out (as are my cites) that cash value plans are heavily marketed proportionate to the actual number of people who would benefit from them.

Nor am I suggesting that these economic forces only exist in insurance. There are studies out there, for example, that show that aspirin (or cheaper Rx drugs) provide better relief for heart ailments than the newest/most expensive drugs. Yet there are economic pressures out there that are pushing for the more expensive drugs.

The SMART consumer should be aware of those economic pressures…and in terms of insurance, the fact is, term life is relatively cheap. Even fruitbat points out that whole life costs 3 to 4 times more. Sorry, I have a hard time believing that there are not financial pressures to sell some sort of deluxe cash value plan.

18

I’m not admitting ANYTHING about a fundamental flaw in my logic. Everything I stated is true. Period.

The OP can do whatever she wants, and if she’s convinced that having to (probably) re-apply should she want more than 20 years is not a big deal, then she’s in the market for term. If she’s not convinced of that, then she’s looking for possibly a term policy with some sort of rider to let her extend or convert the coverage, or a straight up UL. That’s all I said.

I explained why there is a cash value to ULs. That is all true.

It is also that investing and insurance are not the same thing. I hope no one is trying to “invest” in an insurance policy. I got very nervous when clients would use that term. I told them that it wasn’t meant to be an investment, and that if they wanted investments, there were things like annuities etc if they wanted guaranteed investment returns.

The thing I can’t believe has not been mentioned is WHY ULs cost more than term. The simple fact is that they pay out in a greater percentage. More of the policyholders are on the books when they die, and more policies are paid out. It’s a regulated industry; the prices aren’t arbitrary. There’s a reason you have to pay more, which is that statistically you’re more likely to “make” money on the policy than you would be with a shorter term policy.

19

I know neither will be thrilled to hear it, but both **beagledave ** and **Cardinal ** are right. You are arguing past each other while thinking you are arguing with each other. Cash value has its place. The product itself is not a rip off. Insurance companies take on additional liabilities that they don’t have with term and you, as the consumer, pay for them.

It is also true that cash value life insurance is pervasively and shamefully missold for the higher commission it generates. Sites like the Fool do a service by warning consumers to be very careful about signing up for cash value without doing some research. This warning is necessary because a life insurance agent is likely to try to sell it to you.

On a personal note I want to make it clear that I do not actively sell life insurance. I have no financial incentive to promote or defend any type of insurance.

20

With all due respect, I think you’re mis-stating my position.

I never claimed that cash value policies were inherently “bad” or a “rip off”, just that they are not the best life insurance product for most people. And again, the Fools web site that I linked to, even included 4 examples where cash value policies would be worth considering. Of course if you’re not in one of those 4 groups…then yeah, a cash value policy would in a sense be a rip off for you.

I also claimed that they were, for lack of a better term, over marketed for the relatively small pool of folks who would be a good match for that kind of insurance.

Lastly, I suggested that folks should be aware of the financial incentives (you used the phrase “higher commission”, I was trying to be more subtle :wink: ) associated with those kinds of products.