Today’s post is written by Jimmy McMillan, a life insurance expert who specializes is finding affordable coverage for people with heart conditions (like me) who often end up paying more than they should because they don’t know how to find the best provider. I actually met Jimmy on the train from the airport headed to FinCon, and the idea for this post was born then. You can see more of Jimmy’s work at heartlifeinsurance.com.
Are you on a journey to financial independence? Me too.
What if you die before you get there? If you have others who depend on your financial support, what are they going to do without you?
As we diligently review our spending, supercharge our savings and fine tune our financial plan, have you ever thought about what happens to the plan if you’re not in it? While you are building a castle of assets to provide for early retirement, how do you protect what’s most important in the meantime?
Imagine life insurance as your castle’s moat, walls and drawbridge — the first lines of defense for your growing assets. If you have a family, or you have a loan cosigner (like for your student loans) this protection is critical.
That doesn’t mean you need to pay an arm and a leg for it.
The cold hard facts about life insurance death payouts
Most life insurance policies never pay a death claim.
Think about that for a second. Policy owners are paying into these policies every year and not receiving any death benefit. This makes up a significant, reliable portion of insurance company profits every year.
This information is hard to come by, but industry death claim estimates are less than 1% for employer group policies, less than 5% for term policies, and possibly only 15% for permanent policies.
Why are these payout percentages so low if everybody dies eventually?
The biggest reasons are job changes, policy lapses or policy cancellations. The policy owners decide they can no longer pay for it, or they don’t understand what they bought in the first place. They either cancel it or cash it out before the policy owner dies, and the insurance company walks away with years and years of premiums.
So how do you avoid spending more money on life insurance than you should?
Buy young. Use your youth as leverage.
There are two things that go up on your birthday. The candles on your birthday cake, and your life insurance rates. Take a look at the following rates for $1 million worth of coverage for a 30-year-old man for 30 years:
Among the top ten carriers for this client in great health, his life insurance would cost about $60 per month.
However, what if you take that same client in great health and apply for the same policy at age 50? As you might expect, the numbers are much higher.
Now the average for his life insurance coverage is about $265 per month, or more than $73,800 more than the 30 year old would pay for the same policy.
What could you do with an extra $73,800 to build your assets? You could put a down payment on a rental duplex worth over $325,000, or you could buy 350 shares of Berkshire Hathaway (B). Either choice would be a better financial decision than needlessly throwing your money at a life insurance company.
Wait – so I should get life insurance before I’m married and have children?
Do you ever plan to marry or have kids? Then yes, you should consider it now.
Did your parents help you in college? You may have student loan debt with a cosigner and that debt is difficult to discharge in a bankruptcy. If you die, the debt collectors come after the cosigner – and there is no statute of limitations on how long a debt collector can hound your cosigner after you die. You or your cosigner should have life insurance on you equivalent to the debt owed so that debt doesn’t hurt them if you die.
According to industry statistics, the average life insurance purchaser is a 48-year-old male, married with children. And I’m telling you, he’s about 15 years too late. At that time in life, there are extra mouths to feed and many other obligations, and cash is often tight.
Why wait? Being young and healthy will allow you to purchase much more coverage at a much lower rate than you could later in life.
Take advantage of a clean bill of health now to lock in low rates
Age isn’t the only factor in a life insurance rate. Insurance underwriters will consider your health as well, and chronic conditions have a way of creeping into our lives in our 30s and beyond. This goes double if your family has a history chronic health conditions like heart disease, cancer, diabetes or cardiovascular issues.
Those extra pounds that were so easy to get rid of in your early 20s start to stick around. Blood pressure, blood sugar and cholesterol numbers are up, and they say up. Your friendly underwriter will consider those, too, and locking in a policy before health issues arise can save you tremendous amounts of money.
Rates for the young and the restless versus the not-so-young and restless: Laura’s* true story
At Heart Life Insurance I mainly deal with “high-risk” life insurance, or life insurance for people with heart conditions like heart stents or cardiac arrhythmias. Laura* is a client whom I met in 2010. We approved her for $500,000 worth of 30-year term right after she had her daughter. She qualified for the best health class at the insurance company and didn’t even need to take a medical exam.
Her life insurance was a very affordable $29 per month.
Fast forward to present day. Laura has been promoted a few times at work, she now has three children and needs more coverage due to her growing family.
However, her doctor heard a slight heart murmur and scheduled a consultation with a cardiologist. Then, an echocardiogram during her last pregnancy revealed she has heart valve issues (specifically mild regurgitation over the mitral and tricuspid valve). Furthermore, now she is pre-diabetic, on medication to control blood sugar and about 20 pounds overweight.
These may seem like dramatic health changes; unfortunately, they happen all the time. Laura is not alone. The CDC estimates that over half of all adults have one or more chronic health conditions, and a worsening health outlook as we age is just a matter of fact.
Father Time, along with our genetics, a stressful lifestyle and a Western diet, start to wear our bodies down naturally.
For Laura, when you combine the new health issues along with a higher age, her new life insurance policy will be much more expensive.
Take a look at what she qualifies for today:
This was a difficult phone call to make, because a 400% increase for the same policy is nothing to sneeze at. Laura went from “perfect health” in an underwriter’s eyes to “high risk” in just a few years. Not every life insurance company considers high risk cases either; they will deny them.
So her options were limited and they were more expensive. Not good.
Be thankful for good health
If you are in good health now, it is imperative to cash in on that health and lock in low rates. You truly never know what is around the corner. Thankfully, Laura’s higher income meant she could afford the new policy; though locking in more coverage while she was younger would have saved thousands of dollars.
What do you think future Laura would say to Laura in the past? Her expensive regret is one you can avoid.
*Of course we changed Laura’s name. However, her story is real.
Can you use your life insurance money while you are alive?
If you have a permanent policy that builds cash value, you can always take a loan from that policy and use it any way you choose. That’s an option. Here we will explore other ways people could use their benefits while they are alive, even with a term policy. These are called living benefits.
Life insurance has always paid a benefit on the death of the policy holder. However, what if that person had a serious chronic or critical illness that didn’t kill them?
We are referring to diseases like severe diabetes, high blood pressure, cancer, Parkinson’s, or ALS. People who suffer from these conditions require regular maintenance medications and increased healthcare costs for the rest of their lives, and debilitating cases could require time away from work or home health care.
A stand-alone disability policy or long-term care insurance is the ideal way to handle such situations. If those are out of the budget range, many life insurance products offer such living benefits at no additional cost.
These policies would accelerate part of the policy (usually 25% – 80%) while you are alive, depending on the severity of the illness. The amount left over in the plan is then paid to your family at death.
It’s a terrible situation to be in. However, if you had a heart attack, stroke, kidney failure or needed a major organ transplant, do you think that death benefit could be put to better use before you actually die?
With newer policies, the option is yours.
Life insurance companies expect you to lapse. Don’t do it.
When you stop paying for a life insurance policy this is called a lapse. As previously stated, lapses make up a tremendous amount of the insurer’s profit. A lapse amounts to a donation to a life insurance company all those years while you receive very little benefit.
Consider these strategies to avoid a lapse instead:
- “Buy to the budget” from the start. Usually life insurance is an emotional purchase; it’s top of mind after a funeral or a birth. However, if you cannot afford your policy shortly after you set it up, was it designed correctly to begin with? Probably not. If you are working with an adviser who has your best interests at heart, you will realize that the best policy you can ever buy is the one that is still in force when you need it. Keep this in mind and design your plan with your budget in the driver’s seat, not your emotions.
- Explore the features of your permanent plan. If you have a whole life policy, you may be eligible for reduced paid up life insurance, meaning you would never pay a premium again yet still be covered. In this case, you can use the cash currently residing in your whole life insurance to purchase a smaller amount of permanent protection. For example – we had a client who called frustrated with her current policy. Newly single, she had purchased it nine years ago when she was married and just couldn’t afford it anymore.
Face Amount Cash Value Reduced Paid Up $200,000 $19,200 $51,800
Insurance coverage was still important to her, so with some quick paperwork she was able to get rid of the payment on this policy while still keeping some life insurance in force
- Call your life insurance company and see if you can reduce the amount of protection that you currently have. You can only exercise this option once, however if your policy is at least two years old, this could be an option to get you out of a tight budget spot.
This no-lapse strategy works whether you have a term, universal or permanent policy and you don’t have to go through underwriting again.
For example, we had a potential client looking to apply for a new 20-year term policy for $750,000. He had an existing $1.5 million 30-year term policy purchased nine years ago that he wanted to replace.
Since his kids had moved out during that time, he had purchased a smaller house and his life insurance needs were lower.
It was obvious to me that he could accomplish his goals by lowering the face amount of his current policy. He didn’t need a new one.
Applying for a newer, smaller policy with a shorter term would have been more expensive (by about $900 annually) and he would be subject to underwriting again. Not a good choice. Modifying his current policy was the financially responsible option that fit best within his budget.
|Old Policy Face Amount
|Old Monthly Payment
|Reduced Policy Face Amount
|New Monthly Payment
Here is the bottom line on spending less for life insurance
If you have decided that life insurance makes sense for you and your family, do yourself a favor and get the ball rolling now. You are as young as you will ever be right this very minute, and there is no reason to wait.
- Set up your plan as young as possible and use your good health to your advantage before chronic conditions arise.
- Purchase with your budget top of mind, keep emotions at bay and avoid any sales pressure to do otherwise.
- Use your benefits while you are alive if you need them.
- Avoid lapsing a policy so the plan stays in force.
Your family — and your future self — will thank you.
Jimmy is licensed nationwide and will help you get great life insurance, even if you have major health issues. He is interested in all things finance and prefers boring stocks that don’t cut their dividends. He is a fine fisherman who lives with the catch of his life (Emily) near Florida’s Historic Coast.