Tag Archives: life insurance

Increasing Premiums For Universal Life Insurance

Most people who have financial dependents have a genuine need for life insurance. ?But for the majority of those people, a simple term life insurance policy can fulfill that need in a relatively uncomplicated, inexpensive manner. ?A term policy purchased in early to mid adulthood that lasts for 20 or 30 years (with a fixed premium during that time frame) will protect most families throughout the time when they are financially responsible for children and debts like mortgages. ?After the children are grown, and the mortgage is paid off, and especially after retirement, there is much less of a need for significant life insurance death benefits for most people.

For some people with more complex financial situations (such as a family business that they would like to leave to their heirs, for example), permanent life insurance may be a more appropriate choice. ?But such policies are much more expensive than term life insurance, and tend to be more complicated too. ?For people who really only have a genuine need for the protection offered by term life insurance, the investment benefits associated with permanent life insurance can usually be obtained in a more straightforward manner by simply investing the additional premiums that would have been needed to purchase permanent life insurance.

Although permanent life insurance products can be a useful tool for some clients, purchasing them might not be truly the best financial move for many people who might be better served by a basic term life insurance policy and a separate investment program to accumulate money for later in life and/or to pass on to heirs. ?However, the commissions for agents who sell permanent life insurance is significantly higher than the commissions for term life insurance policies, in part because the policies themselves are so much more expensive. ?This can potentially create a conflict of interest if a client is taking policy recommendations from an agent who will receive the commission for whatever policy is ultimately purchased.

In a reminder that Universal Life insurance (a form of permanent life insurance) premiums are not fixed, a recent class action lawsuit in CA ended with a federal judge ruling that Conseco Life Insurance Co. cannot triple premiums for 50,000 policy holders who have had their policies since the late 80s and early 90s. ?The courts got involved because the proposed premium increases were so significant, but the complexities of universal life insurance include a lot of flexibility in terms of premiums. ?If interest rates drop (as was the case for people who bought policies in the 80s, when interest rates were much higher than they are today), future premiums can increase significantly. ?Although the court has ruled that Conseco cannot triple the premiums for those policy holders, there’s no set limit for how much premiums can increase. ?Older policy holders who have had their coverage for decades can find themselves unable to keep their policy in force if premiums rise beyond what they can afford.

Anyone in the market for a life insurance policy should be well aware of the differences between term life insurance and permanent life insurance, and should understand the long term implications of each type of coverage before selecting the best option for their particular situation.

Viatical Settlements – Buy At Your Own Risk

This Wall Street Journal article from last week reminds me of the advice we hear about things that sound too good to be true. ?Viatical settlements or “life settlements” are arrangements in which investors (or intermediary companies) purchase existing life insurance policies from people who they think (hope?) will die within the next few years. ?The investors then continue to pay the premiums on the policies until the original policy owner dies (at that point, the investor gets to collect the life insurance pay out).

Life Partners – a company that purchases the policies and then resells them to investors – advertises that its policies are “priced to target a compounded return of 12-14% at life expectancy.” ?But it looks like they have been underestimating (by a wide margin) the life expectancies of the insureds whose policies they purchase. ?If the insured lives longer than the company has predicted, the investors’ returns start to drop off. ?And it looks like the vast majority of the policies purchased by the company over the last several years are still in force, even though many of them were expected to “mature” (ie, the original policy owner was expected to die) by now.

Last year, Fred Joseph, the Colorado Securities Commissioner, testified at a Senate hearing that viatical settlements present “… significant risk to policy holders and investors.” ?And Colorado securities regulators have tussled in court with Life Partners, alleging that the company doesn’t disclose to investors how accurate their life expectancy predictions are, or the fact that if future premiums aren’t paid, the policies can lapse (although that aspect of insurance is relatively common knowledge, in a life settlement scenario it’s possible that investors might not understand that they have additional financial responsibility beyond the purchase price of the policy).

Viatical settlements do provide both an investment opportunity as well as a way for insureds to cash in on a portion of the face value of their life insurance policy before they die. ?But they are not a get rich quick scheme. ?In addition to the moral questions some might have about betting on a stranger’s somewhat rapid demise, there’s also a risk that the insured might live far longer than the projected estimate, and the premiums that the investor must continue to pay will slowly eat away at the anticipated return on the investment.

Disability And Long Term Care Riders On Life Insurance Policies

One of the advantages of permanent life insurance is that there are all sorts of riders that you can purchase along with the policy. ?Two that could be particularly useful are available through The Hartford: ?The LifeAccess rider and the Disability Access rider. ?The LifeAccess rider aims to take the place of a long term care insurance policy for people who have life insurance but not a separate long term care policy. ?The Disability Access rider provides a safety net for people who don’t have short term disability insurance coverage (the rider does not provide long term disability coverage).

Sales of the LifeAccess rider are up 80% nationally (the rider was first introduced in 2007) in the past year, and that may have something to do with the rising price of long term care policies recently. ?The rider can be added to a permanent life insurance policy for a cost ranging from 5% to 15% of the cost of the life insurance policy. ?The rider will generally be less expensive than a long term care policy on its own, but the cost of the permanent life insurance will be much more than the cost of a term life insurance policy with a similar face value. ?For most people, it probably makes more sense to purchase a term life insurance policy and a separate long term care policy. ?But for people who have a genuine need for a permanent life insurance policy, adding a long term care rider could make a lot of sense. ?In addition, the LifeAccess rider is more leniently underwritten than stand-along long term care policies, which might make it an attractive option for applicants with less than perfect health.

The Disability Access rider has been available from The Hartford for a little over a year, and costs an additional 6% to 10% of the cost of the life insurance policy. ?It has a monthly benefit cap, and a lifetime cap of up to 24 monthly payments. ?The monthly benefit cap is calculated when the policy is issued, and cannot exceed $5,000. ?The money can be used to protect the insured’s lifestyle/income in the event of a disability, or to pay for a buy/sell agreement or key man insurance policy depending on the insured’s business situation. ?As with the LifeAccess rider, this rider only makes sense if the insured truly has a valid need for a permanent life insurance policy and is able to pay the premiums that it entails. ?For some people, it will be a good option, although term life insurance and a separate disability insurance policy might be a better choice for a lot of people.

Term Life Insurance Sales Lower In Second Quarter

There was a sharp increase in the number of life insurance policies sold in the first quarter of 2010 when compared with the same time period in 2009. ?And now the second quarter of 2010 has posted another strong increase. ?Compared with the second quarter of 2009, annualized premiums for individual life insurance policies were up 7% in the second quarter of this year.

Whole life, universal life, and variable universal life are all being purchased more this year than last year. ?But term life insurance did not show gains; annualized premiums for term policies dropped 11% in the second quarter of 2010. ?I find this interesting, given that term life insurance tends to be the most appropriate choice for the majority of the population that needs to secure death benefits.

It’s possible that the slowly-rebounding economy is responsible for the shift from term to permanent life insurance products, and for the overall upswing in total annualized premiums. ?For the last couple years, the recession has meant that most of the country has been tightening their budgets. ?Term life insurance policies are a lot less expensive than permanent policies, so for people who needed to buy life insurance during the recession, term products were likely more popular. ?But now that the economy is showing signs of recovering, people may be more apt to purchase higher-cost permanent life insurance policies that grow cash value or include an investment component. ?It will be interesting to see how the numbers play out for the rest of 2010… will term life insurance policy sales bounce back, or will the growth of permanent policies continue?

What To Do With Life Insurance Proceeds

When a person loses a loved one and is the beneficiary of a large chunk of life insurance money, the handling of that money might take a back seat to dealing with grief and loss. A death in the family – especially if the person who died is a primary earner – will likely result in some financial upheaval, but it will also be emotionally devastating, and survivors may be ill-equipped to make major decisions about what to do with the life insurance money they receive, especially if it’s a large sum.

A recent NPR article details how the families of servicemen and women killed in battle are being given “checkbooks” that represent the value of the fallen soldier’s life insurance policy. The life insurance companies are keeping the money in their own investment accounts, earning several percent interest, and paying 0.5% interest to the policy beneficiaries. The carriers point out that if they didn’t offer this option for the families to earn half a percent interest on the money, it might just sit somewhere, earning no interest at all. I suppose that’s true, but families should be aware that they have lots of options, and that taking the default choice of letting the life insurance company handle the money for them (and keep a good chunk of the interest earned) might not be the best one.

Trying to figure out what to do with a large chunk of money from a life insurance settlement can be difficult in the best of times, and nearly impossible when a person is grieving. It makes much more sense to sketch out the details of what your family would do with any life insurance money before that situation arises. If you don’t die while your life insurance policy is in force, the plan won’t ever be needed. But if you do pass away and leave your beneficiaries with life insurance money, it will make things a lot easier for them if the family has a plan in place and they can simply use the money as planned, without having to make decisions while grieving. And it will make it much less likely that the surviving family members will be duped by unscrupulous “advisors” or companies that don’t have the beneficiaries’ best interests in mind.

A financial advisor can provide advice, but there are also lots of financial advice websites that can provide guidance for people trying to figure out what to do with any sort of windfall, including life insurance proceeds. Planning now for what you might do with life insurance money will likely make things easier if and when you find yourself receiving life insurance following the death of a loved one.

Comparing Life Insurance Options

This week’s Cavalcade of Risk included an informative article at the Consumer Boomer blog about how to compare different types of life insurance policies. ?The article did a good job of detailing the major differences between term life insurance and permanent life insurance (both universal and whole) but not much was said about the cost differences, other than to note that the permanent policies are “more expensive”. ?Permanent life insurance is dramatically more expensive than term coverage – often ten or twenty times as much in annual premiums. ?For some people, the benefit is worth it. ?But for most of us, it makes sense to buy a term policy and keep our investments separate from our life insurance. ?But either way, the Consumer Boomer article provides a good summary of how the various types of coverage work. ?If you’re in Colorado and you’d like to get quotes for your particular life insurance needs, we’re be happy to help.

Increasing The Amount Of Life Insurance Money Exempt From Creditors

The 2010 Colorado legislative ended last week, with mixed reactions from lawmakers (seemingly divided along party lines in terms of whether they felt that the session was bipartisan or not). ?One of the bills that passed was Senate Bill 147, sponsored by Senators Lundberg, Penry, King K., and Sandoval.

SB 147 will allow up to $100,000 of life insurance proceeds to be exempt from the insured’s creditors. ?This law will go into effect on September 1, 2010. ?Until then, the current cap of $50,000 will apply. ?26 states have an unlimited exemption for the protection of life insurance settlements from an insured’s creditors. ?The new Colorado law will bring the state a little closer to the protections offered to beneficiaries in other states, although $100,000 still isn’t really a lot of money in terms of protecting a family’s financial future if the primary earner dies.

Owning Fast Food Stock Not Such A Bad Thing

A few weeks ago, a news story broke about health and life insurance companies owning stock in fast food companies. ?The story was quickly picked up by bloggers and spread around the internet as an example of the evil practices of insurance companies. ?From the beginning, I saw it differently. ?Any publically owned company (as most health and life insurance companies are) has a responsibility to its shareholders to do what is in the best financial interest of the company. ?In the case of life and health insurance companies, premiums are typically invested before they are used to pay claims, and it makes sense that they should be invested in the stocks that will make the most money.

The Notwithstanding Blog recently published an excellent article detailing the reasons why the tiny percentage of fast food stocks owned by major health and life insurance carriers is insignificant when compared with their overall portfolios, and also not detrimental to their policyholders. ?In fact, if stock market profits are used to help keep premiums lower than they would otherwise be, policyholders are financially better off than they would be if the insurance companies were invested in a less profitable stock.

Would we be better off without fast food restaurants, or with far fewer of them? ?Probably. ?Would we be healthier and our health and life insurance premiums be lower? ?Maybe, although it’s reasonable to expect that people might find other sources for junk food. ?We pay insurance companies to protect our assets and our financial futures (and those of our loved ones) in the event of an illness, injury, or death. ?Their chief responsibility to us as policyholders is to remain financially solvent and profitable in order to be able to pay claims as they arise. ?Investing in profitable stocks is a good way to go about that, and the fact that some of those stocks are in fast food companies is irrelevant.

In addition, I’m curious as to how many of the people who are outraged by this issue own mutual funds or index funds that hold some stock in fast food companies. ?McDonalds is part of the Dow and the S&P 500, so it’s likely included in a lot of basic funds.

Electronic Underwriting Coming To Life Insurance

At Insurance Shoppers, we’re big fans of things that can be done electronically. ?We switched to an electronic fax system years ago, and long ago made the change to electronic application for all of our health insurance clients. ?So we’re excited about Hooper Holmes’ new iParamed e-Exam, which can create a complete digital case file for any life insurance applicant in the US.

Roy Bubbs, President and CEO of Hooper Holmes, noted that life insurance carriers spend an average of $500 to underwrite an application, and he believes that his company’s product that reduce that amount by half. ?My guess would be that it will also speed up the underwriting process, much as the electronic application process for health insurance policies reduced underwriting times for some policies from weeks to days over the last decade.

The iParamed e-Exam technology will come out in four stages over the course of the next several months, and will be fully operational by the end of 2010. ?Nine life insurance companies (hopefully including some that we work with here in Colorado) will be using the technology initially, and my guess is that the rest will soon follow, either with the Hooper Holmes product or with a similar electronic system.

What You should Know About Permanent Life Insurance

A recent article on CNN Money lists five things you should know about permanent life insurance:

1. ?It might be more coverage than you need… or at least coverage for longer than you need. ?Because permanent life insurance is so much more expensive than term life insurance, people might get a lower face value than they really need, but end up with life insurance long after their children are grown and the house is paid off. ?It usually makes more sense to purchase a less expensive, higher face value term policy, which will truly provide financial protection to your family while they need it – ie, while children are young, college still has to be funded, and payments are still being made on the house.

2. ?It may not be your best investment. ?The idea with permanent life insurance is that it provides a death benefit, but also builds cash value via investments. ?But for most people, it makes more sense to purchase insurance separately from investments. ?It’s hard to tell where your money is being invested in a permanent life insurance policy.

3. ?But in rare cases, it’s just the ticket. ?I would say that these are very rare cases, but they do happen.

4. ?The right flavor makes all the difference. ?Deciding among the three types of permanent life insurance policies (universal, variable, and whole) will likely require extensive research and/or a meeting with a financial advisor.

5. ?Dumping a policy will cost you. ?It takes many years for the cash value in permanent life insurance policies to build up to a significant amount of money. ?If you cancel a term policy early, you’ve only paid for the life insurance protection you got during the years you had the policy. ?But if you cancel a permanent policy in the first 10 or 15 years, you will likely have paid a lot of money (above and beyond what you would have paid for just having the death benefit of a term policy) and get very little in return. ?A permanent policy is really only appropriate if you know that you’ll stick with the policy for the long term.

Permanent life insurance is a good option for some people. ?But if you choose to purchase it, make sure that your decision is based on independent research or advice from a qualified professional who does not have a vested interest in your decision. ?The premiums – and thus the commissions – are significantly higher on permanent life insurance policies; if the person advising you to opt for a permanent policy is also making a commission based on the policy you buy, you might want to get a second opinion.