Friday, April 13, 2018

19 Ways to Save Money on Life Insurance Premiums

How to Save Money on Life Insurance Premiums

In this article, I'm going to share with you some tips you can use if you want to know how to save money on life insurance premiums. Many of these things are simple strategies while others will require a change in habits. OK. let's get started with my list.




1. Buy life insurance sooner rather than later


The first question that life insurance companies ask is your age. The older you are the more that life insurance is going to cost you. The younger you are, the cheaper it is.

Obviously you can’t control your age. But what you can control is whether or not you keep waiting to buy insurance.

No matter what your age, if you think you need life insurance, it’s time to look now. That’s because it won’t get any cheaper than it is right now.

2. Stop cigarette smoking, cigar smoking, chewing, vaping or using any kind of tobacco


The second question that the life insurance company will want to know is if you use tobacco products. Smoking and other tobacco use raises your premium by two to three times more than what a non tobacco user pays.

Whether you think it’s fair or not, if you can quit using tobacco, you can save drastically on your life insurance. This would apply to both new policies and existing policies in force.

Every insurance company words there tobacco use question differently. They also will have a different set of policies regarding how long you have to be tobacco free in order to say you are a non tobacco user.

Take the time to read the tobacco use question carefully. Talk to your agent about the question if you need to so that you answer it truthfully.

3. Lose weight, lower your blood pressure and cholesterol


Another big factor after tobacco use is your weight. If you weigh more than you should and can shed some pounds before you apply for life insurance, that’ll help lower your premium.

Do some research to see how much you should weigh at your height and try to get close to that weight.

Better eating habits will help you lose some weight if you need to and also that’ll help in another area.

That is with your blood pressure and cholesterol.

4. Keep your motor vehicle record clean


Insurance companies check your driving history. Speeding tickets, accidents and other moving violations are red flags when the underwriter reviews your application.

Make a point to be more careful driver. If you get stopped for speeding, check into any diversion programs that can keep it off your driving record.

An added benefit to keeping your driving record spotless is you’ll see lower auto insurance rates as well.

5. Keep away from hazardous activities


While things like scuba diving, race car driving, skydiving and other crazy activities can be fun, they also put you at higher risk of dying than other people who don’t participate in those activities.

If your job doesn’t require you to do hazardous things, refrain from doing them so they aren’t held against you when you apply for life insurance.

6. Don’t smoke marijuana (even if it’s legal), do drugs or other illegal activities


The legalization of marijuana in certain states of the country doesn’t mean that insurance companies won’t care if you use it. It’s a good idea to stay away from marijuana use as well as other drugs.

Of course, active drug use is a major concern to an insurance company when they look at your life insurance application. Don’t do drugs.

Also, stay out of legal trouble.

7. Exercise three or more times a week


Insurance companies sometimes give discounts if you are exercising on a regular basis. While exercise alone won’t reduce your rate, if it’s combined with other positive factors on your application, it could.

8. Go to the doctor every year and keep any medical conditions in check


Insurance companies like to see that you are taking care of yourself. If for example, you have high blood pressure, and are going to the doctor every year and keeping it under control with medication, it will look a lot better than if you don’t and could result in a more favorable premium.

9. Don’t buy universal life insurance. Stick to term and whole life only.


If you have read any of my articles, you’ll know that I’m not a fan of universal life insurance. That’s because most are underfunded. That means they may require extra premiums when you get older which can prove to be an expensive problem.

The reality is that many universal life insurance policies are at risk of lapsing in your later years when you need it most. When a universal life policy lapses because it was underfunded, it really was a just very expensive term policy.

While I suggest everyone have at least some permanent life insurance for final expenses, you should make sure to avoid buying any universal life policies. If you feel you need some permanent life insurance, stick to whole life insurance policies only.

Term life insurance is important to have as well and the great thing about term insurance is that it’s cheaper than whole life.

I personally think that everyone should have some of both types of life insurance - some term and some permanent life.

Just make sure that when you buy permanent life insurance, that it’s not universal life. Make sure it’s whole life.

10. Take advantage of your group term life insurance at work (but don’t rely on it)


Group term life insurance may be a source of cheap term life insurance when you are younger. Traditional group term life insurance rates typically go up every five years. Eventually this will price you out of it or it’ll get reduced by an age reduction schedule.

If you are young and your employer offers an issue age based plan that keeps you in the same age bracket, I’d suggest you take advantage of it. An issue age group life plan doesn’t increase in rates every five years.

I don’t suggest you rely on solely on group term life insurance, though. You don’t control it and will most likely outlive it.

11. Buy a fully underwritten policy


In order to get the best life insurance rates from the insurance company, you’ll need to provide a full medical history. You may also need to provide blood, urine, EKG or sometimes even some sort of cognitive testing.

The insurance industry is changing and they now make more decisions based just off the life insurance application and your medical information obtained from the medical information bureau (MIB) than they used to.

However, you can also buy policies called nonmed policies which require less information than fully underwritten policies. In exchange, everybody pays a little higher rate than you might have had you gone through fully underwritten policy.
If you are healthy, you’d be better off going with a fully underwritten policy.

However, if you are not sure how healthy you are, never go to the doctor and never have any lab work done, it might make sense to buy a nonmed policy first. Once it’s in place, then you could replace it with a fully underwritten policy.

12. Don’t lie on the life insurance application


These days insurance companies rely more heavily on the medical history provided on your application matching up with what’s in your medical history provided by the MIB.

If the information you provided doesn’t match what’s in MIB, then the insurance company will take a closer look at your life insurance application and request further medical requirements.

You also don't want to lie on the life insurance application because your claim could be denied down the road.

Make sure you provide your agent with the complete and truthful answers to avoid the underwriter taking a second look at your application.

13. Be properly prepared if you have to take a medical exam


After you have scheduled any medical requirements, don’t go out partying, drinking, smoking marijuana or any other crazy stuff that could negatively affect your results.

I once had someone do that and it had a drastic impact on the premium. So much so that we had to reduce the face amount.

Keep a clean diet and get plenty of rest in the time leading up to the exam.

14. Attach a level term rider to a whole life policy instead of buying separate policies


Each policy written collects a policy fee. So if you want a whole life policy and a term policy and you buy them separately, each policy has this policy fee.

If however, you buy one whole life policy and attach a level term rider to it, you only pay one policy fee. While policy aren’t huge, it’s still a way to save some money.

15. Pay your premiums annually


Instead of paying your premiums monthly, pay your premiums annually, you could save 10 to 15 percent just buy paying the annual premium.

16. Take advantage of pricing bands


When buying term life insurance, insurance companies will sometimes have internal rate charts that make lower face amounts a little more expensive than higher face amounts. What this means is that it’s entirely possible that you could pay close to the same premium for more insurance. Check with your agent when you buy your policy.

17. Check for multi-policy discounts


If you have more than one policy with an insurance company, you might qualify for a multi-policy discount.

18. Remove riders and ratings that no longer apply


For existing policies you have, review them for riders that might not be applicable any more. Also check for rated life insurance policies. A rated policy is one that contained an extra charge because of a health issue or other risk.

You might be able to apply to have these removed or buy new policies that won’t have those ratings.

19. Work with an experienced agent


An experienced agent can make sure you properly navigate through the underwriting process when you buy life insurance. While not everybody can qualify for the lowest possible rate an insurance company will give, an agent familiar with these guidelines and solid knowledge of the insurance companies policies and procedures will help.

Lowest price isn’t everything


Price is important, but not the most important thing when buying life insurance. It’s worth paying a little extra for certain things like a solid company, a good agent, great policies, guarantees and other options.

You often get what you pay for.

Conclusion


Those are 19 tips that might help you save money on any of your new and sometimes existing life insurance. Some are easier than others of course.

Let me know in the comments if you have used any of my suggestions.

But, don’t let not being able to do all these keep you from buying life insurance.

If you need life insurance, you should definitely start the process of getting coverage.

Also, if you need some individual life insurance, and want to help support this site, why not let me be your life insurance agent. Click the red button just below or click ask for a proposal.

Wednesday, April 11, 2018

3 Reasons You Should Add a Children’s Term Rider

Children's Term Rider

Over the years, one of my favorite life insurance riders has been the children’s term rider. The children’s term rider is an often overlooked because a lot of agents haven’t sat down and figured out how to use it properly. In this article, I’m going to list my three reasons to add the child term rider and go into more detail about how and when I like to use it.




What is the children’s term insurance rider?


A child term rider is an option you can add to your life insurance policy for a small extra premium. It provides an additional amount of term life insurance for each of your eligible children.

Reason #1: One low rate for all eligible children no matter how many you have


The first reason I like to add the child term rider is if you have a lot of kids. For example, if you have six children, you might not want to buy a individual policy for each child because each individual policy requires a separate premium for each child.

However, with a child rider, it’s one rate for all kids. It’s also pretty cheap.

For parents that have a lot of kids, it’s so inexpensive per child, it’s crazy not to add it.

Reason #2: New children are usually added automatically after a certain number of days


I often work with employees who buy permanent life insurance during an open enrollment period at work. Once the enrollment is over, they may have to wait to buy additional life insurance until the next enrollment. This might be a year later.

If you are expecting a new child in a few months, you might not want to wait several months until the next enrollment to get life insurance on your child.

Here’s where the child term rider can help. That’s because new children are often automatically covered under a child term rider a couple of weeks after they are born.

In order for this to work though, you’ll have to already have children. Most insurance companies won’t let you add the child rider if you don’t have any children.

But if you do have eligible children, you can add the rider and a few weeks after your child is born, they'll be covered under the rider. This reduces the time a child would be without life insurance coverage.

Then, when the next enrollment comes around, if you want to pick up some permanent coverage, you can look into it at that time for all of your children.

Reason #3: Convertible without any medical questions


This is my favorite feature of a child term rider. Most of the child term riders I have worked with have had a guaranteed conversion option.

This means that you can change the child term rider from a term policy that will expire at a certain age into a permanent policy that the child can keep for life.

This is a huge option if you have a child who gets a health issue while covered under the rider. You’ll be able to convert without any medical questions and might be able to get a policy for your child that you wouldn’t have been able to get any other way.

In addition, sometimes the amount of life insurance you can convert to is higher than the amount of insurance provided by the rider.

Additional things to know about child term riders


Now that you know some of the reasons I love child term riders. Here are some other important things you should know about child term riders.

  • Check eligibility Be sure to check who is an eligible child to be covered under a rider. Eligibility may be affected by age and whether they are a dependent or not. You as the insured will also have to be within certain ages to add a child rider.
  • Add all kids who are eligible on to the rider Sometimes, parents will exclude children who are otherwise eligible. Include all eligible children because there is no difference in price to list them on the rider.
  • Child term riders expire at a certain age Child term riders can’t be used as permanent insurance because they will expire when the kids reach a certain age.
  • Grandchildren can’t be covered under a child term rider Child term riders don’t extend coverage to grandchildren unless you’ve adopted them. You’ll have to buy individual permanent policies on them.
  • Buy the max child term rider I always offer the max child term life rider people can get. The cost is so minimal it only makes sense to do that.
  • Conversion ages and options can vary You’ll want to know at what age you can convert a child term rider. Be sure and read the contract to see what those options are.
  • Child term riders might change to paid up coverage upon the death of the parent Find out what happens if you die. Does the rider continue? In most case, the answer may be yes.
  • You’ll have to remove a child term rider once all of your kids age out The insurance company doesn’t automatically remove a child term rider. That’s because they don’t know if you have had any additional kids since it was put in place. If all of your children are no longer eligible, you’ll want to drop the rider. No sense in making that life insurance mistake and paying for a rider you no longer benefit from.

Those are some important additional tips to remember about child term riders.

Don’t let your child term riders expire without reviewing them


It’s my guess that most child term riders expire without anyone reviewing whether conversion to a permanent policy makes sense. Don’t forget about your child rider or let it expire without at least checking into it.

I’ve had people forget about the rider and miss their option to convert the rider to a permanent life insurance policy for their child.

Unfortunately, once the coverage expires, the conversion options available under the rider also expire.

Read your life insurance contract


As always, every life insurance contract is different. You have to read your contract to see what is allowed.

Conclusion


I love the child term riders. It’s a cheap way to get coverage if you are tight on cash. You can cover a bunch of children for very little money. And, if the child rider is part of a guaranteed issue offer at work, it’s a great way to get coverage for a child who might not have otherwise been able to get a policy.

Over the years, I’ve helped a ton of parents get coverage that way. Be sure and check into it.

Let me know if you have any questions about this in the comments below.

Also, if you need some individual life insurance, and want to help support this site, why not let me be your life insurance agent. Click the red button just below or click ask for a proposal.

Tuesday, April 10, 2018

How to Reconcile an Employee Benefits List Bill


If you are new to doing payroll for an employer group that offers any voluntary benefits, you'll soon discover that you'll need to send in the premiums you've been collecting from the employee's paychecks for those benefits.

It's a common practice for the insurance companies that offer these voluntary benefits to send a list bill to your company. You'll get this bill either in the mail or online. In this article, I'll walk you through what to do with this bill including how to reconcile it.




Why you should you reconcile the list bills you receive


Before I talk about how to reconcile your bill, you might wonder why you should reconcile the bills you receive in the first place. I have worked with employer groups who never reconcile their bills either because they didn't know that they should or a variety of other reasons.

Surprisingly, some employer groups just pay the amount listed on the list bill whether they collected that amount or not. One employer group told me they sent in thousands of dollars in premiums for health insurance that they didn't collect from employees. This meant they were either out of that money or had to collect it retroactively from employees who were still there.

It's a good practice to reconcile the list bills you receive from the insurance companies with the payroll registers. That's because it's a lot easier to correct a problem when it occurs than five years after the fact. Problems discovered that far down the road can't easily be corrected - if at all.

Obviously, reconciling takes time to do. This can be a problem if you are working with thousands of employees. In many cases, large employers just send in their payroll registers and let the insurance company reconcile it.

Work with your agent to figure out a plan that works best. Over the years, I've reconciled bills for my employer groups whenever I've made changes, they've made a change in the person who handles the payroll or for a variety of other reasons. Some employers have even paid us to have their bills reconciled because it was cheaper and more effective to do it that way.

OK. Let's move on to how to reconcile your bill.

Identify all payroll deductions


It's a good idea to be proactive and make a list of all the payroll deductions that are setup in your payroll system. This will give you a clearer picture of what kind of accounting you'll need to do. It will also help you know what list bills to watch out for.

Find the voluntary benefits list bill


If you are on paper billing, one day your bill will arrive in the mail (or sometimes fax).

However, a lot of bills these days are delivered online. You might just get an email from the insurance company letting you know that a new list bill is available. You'll just need to login to see it.

You might have to ask the previous payroll person what the login information is or you might have to dig through their old files to find it. Call the insurance company or agent that services the account if you can't find it.

It's probably a good idea to change the password when a new person starts taking care of the bills so the previous person won't have access anymore. Sometimes you might also need to change the email address associated with the account as well.

Assuming you've gotten logged in, you'll either be able to print a bill out or view it some sort of billing interface.

Personally, I like to print the list bill out if I can so I can make notes on it.

In either case, look at the bill carefully for the billing frequency. In most cases, it will say monthly. But you'll find there are insurance companies that send a bill out for each payroll when a deduction comes out. This means it might say weekly, bi-weekly, semi-monthly or some other frequency.

Depending on your payroll setup, it's also possible you might receive more than one bill for the same insurance company. This could happen if you have some employees who get paid every week, others who get paid every two weeks and so on. From an administrative standpoint, it's easier to set up a separate bill for employees paid one way versus employees paid another.

Whether the bills are separated out like that will depend on who set up your employer group's account with the insurance company.

You may also have a file that contains copies of previous bills paid. This will be helpful to see how the previous person reconciled the bills.

Once you identified the bills you receive and the frequency, move onto the next step.

Print out a payroll register


The next step is to print out a payroll register that lists the deductions collected for the insurance company who sent you the bill. You want this payroll register to match the frequency the list bill covers.

For example, if the list bill is a monthly bill, print out a payroll register for the month. If your list bill matches your payroll frequency, then print a payroll register out for each pay period.

If you receive a different bill for employees paid on a different payroll frequencies, you'll want to print out separate payroll registers for those groups of employees.

Following these steps will make it easier to reconcile the bills.

Just like the list bill, I like to print the payroll register out so I can set them side by side for the next step.

Make a copy of the list bill


If I only have one copy of the list bill, I make a copy of it before I begin. That way, if I make a mistake, I have a clean copy I can work with as a back up.

Read the instructions on the list bill


The list bill will usually provide some instructions that will give you additional information about how to reconcile the bill. You'll also find out ow to let the insurance company know what your adjustments to the bill mean.

This will include things like how to note terminated employees and a place to write in how much you are including with the bill.

In any case, take a good look at the instructions. This will help you better administer that deduction with the insurance company.

Compare the payroll register to the bill


Next, you'll want to compare the payroll register to your list bill. I like to look at the first name on the payroll register and the amount deducted. Then I look at the list bill to make sure it matches.

As you do this, one of four things will happen.

  1. The deduction on the payroll register and the list bill match exactly If this happens, I put a check mark next to the deduction on both the payroll register and the list bill. Then I move on to the next name.
  2. The deduction on the payroll register does not match the amount shown on the list bill If this happens, I cross out the amount on the list bill and write in the amount that was deducted. I then circle the amount on the payroll register to remind me it was different. Next, I figure out the difference between the amounts and write the difference collected. If I collected more than what was on the bill, I put "+" next to the difference. If I deducted less than the bill shows, I put a "-" next to the difference.
  3. You have a deduction on the payroll register but that employee is not listed on the bill If this happens, I circle the amount on the list bill and write in the employee's name and deduction amount at the bottom of the bill.
  4. You notice an employee on the list bill but not on your payroll register If this happens, first circle the name on the list bill to remind you that this is an item you need to research. Most of the time, this is a terminated employee. But not always. It could be the employee cancelled the deduction with you and the insurance company doesn't know yet. It might also be that the employee didn't get paid and had no deductions. You'll want to subtract these amounts from the total the insurance company says is due.
You'll do this for each deduction on the payroll register until you've reviewed the entire bill. If you had to make adjustments, then you'll need to review those adjustments more carefully to find out what the reason is behind that difference.

Identify the adjustment amounts and balance your payroll register to the bill


Once you've gone through your entire payroll register, you want to add and subtract all the adjustments you noted from the amount the list bill says you should have collected as follows:

  • Add and subtract all the differences you noted on your payroll register
  • Subtract all the amounts for employees listed on the bill but didn't have deductions for
This gives you a total adjustment.

Add or subtract this adjustment to the amount the list bill says is due.

It should match your check. If it doesn't you'll need to recheck your math.

Once you've balanced, double check to make sure you followed the insurance company's instructions on how to note adjustments to the bill both in the amount you are sending as well as any information specific to each employee with a difference.

Contact your agent about any discrepancies you don't understand


Always reach out to your agent if something doesn't make sense. For example, if you have deductions for an employee but they don't show on your list bill some reason, that's something you'll want to figure out.

Other list bill reconciliation tips


Here are some additional tips that will help you reconcile your bills better:
  • As a general rule, always send in what you collect If the insurance company has been receiving the premium for an employee, it's always easier to correct any billing issue if premiums have been paid than if no money was sent in. If an employee cancelled coverage, the insurance company will usually refund that money to the policyholder.
  • Always keep a paper trail for deduction changes For my policyholders, I always ask the employer groups to have the employees contact me for any changes. Once I've worked with the employee and we've sorted out what they want to do, I send a payroll adjustment to the group. While you can certainly just have the employee notify you in writing what they want to do, it's much cleaner when the insurance company is involved to do their paperwork to.
  • Have procedures in place for missed deductions If an employee is off work due to a short leave or didn't have deductions taken for some other reason, decide how you want to handle those deductions. Sometimes employers collect a check from the employee to submit with the bill and other times, the employer will pay the bill and work with the employee to double up on deductions to get employees caught up once they get back. 
  • Remember every employee benefit is different You might handle your health insurance bill different than other supplemental benefits. Some bills premiums are collected in advance. Others, you just forward what you collect. Still others are pre-tax benefits that can't be changed during the year absent a status change. Work with your agents on each benefit and handle them in a way that both of you agree on.
Alright, those are some additional tips that usually help keep things cleaner. Now that aware of those and you've balanced your bill, it's time for the final step.

Make copies of your final reconciliation and send in your payment


Once you've reconciled the bill, make a copy of the reconciled bill and the payroll register that you reconciled it to. Keep a copy for your file.

Send your payment along with the reconciled list bill and the payroll register you used to balance the bill to the insurance company so they can make sense of what they have received from you.

Conclusion


Congratulations on reconciling your bill. Reconciling the list bills you receive is important. Work with your agent to develop the right way to reconcile each bill you receive.

Once you get the hang of the steps, and become more familiar with the employees on that particular list bill, the easier it becomes.

Let me know if you have any additional tips in the comments.

As always, if I can help you in any way, don't hesitate to reach out to me. I'm happy to help.

Friday, April 06, 2018

Should You Add the Accidental Death Benefit Rider?

Accidental Death Benefit Rider

One of the first life insurance claims I had, the lady died in an accident. She had the accidental death benefit rider on her policy which doubled the face amount of her life insurance. At the time I wrote her policy, I wasn’t big on adding accidental death benefit but she wanted to add it so I did.




Not too long after, I had another life insurance claim for another lady who had also died in accident. However, in her case, she decided not to add the accidental death benefit. While the policy still paid out, it did not double the face amount.

I remember when the second lady bought her life insurance, we briefly discussed whether or not she should add the ADB rider to her life insurance. It was pretty cheap, so cheap she should have added it. She kind of hesitated when she said she didn’t want to add it. I didn’t say anything and moved on.

From that point on, my opinion changed some about whether or not you should add the accidental death benefit rider. Because of that, I at least make sure I do a good job of explaining the ADB rider and offer the option to everyone who buys a policy.

What is the accidental death benefit rider?


The accidental death benefit rider is one of several riders you can add to your life insurance for an extra premium. If you add it and die in an accident, it will double the face amount. In the past, it was called double indemnity - since it doubles the face amount. However, these days, it’s usually just called ADB - accidental death benefit.

The difference between ADB and AD&D


Many people incorrectly assume that the ADB rider is the same as another rider called AD&D - or accidental death and dismemberment. AD&D provides two potential benefits. One benefit is that it doubles your life insurance if you die in an accident. The second benefit is that it also pays for dismemberment benefits. Dismemberment is if have an accident and lose a hand, limb or other injury classified as dismemberment by the policy.

The difference between ADB and AD&D is that ADB doesn't include any dismemberment benefits. I would say that ADB is more common on individually purchased life insurance policies. AD&D is more common in group life insurance or for stand alone accidental death & dismemberment plans.

Accidental death benefit rider exclusions


The accidental death benefit rider will only pay a benefit if you die in an accident. If you die of natural causes, then the ADB rider would not pay double. 

There are other potential types of accidental deaths that might be excluded and those vary by policy. In addition to natural causes, you can also expect things like skydiving, race car driving, suicide, criminal activities and things like acts of war could and probably will be excluded.

In addition, coverage under an ADB rider will often end at age 70. If that's the case, any accidental death that occurs after age 70 wouldn't be covered.

Again this will vary by policy and so you'll need to read your policy to see exactly what types of exclusions there are.

For accidental deaths that would be covered under the rider, you can read the article I wrote where I give a list of examples of what the insurance company would consider accidental death.

When should buy the accidental death benefit rider?


Since the odds of dying in the United States by accident is around 5%, some people don't see the need to add the ADB rider. Statistically, it is true, that you are more likely to die by natural causes than by accident. 

However, if we use that logic and go by pure statistics, nobody should buy term insurance either. That's because it's estimated that only 2% of all term life insurance policies pay out and yet lots of people are advised to buy term life insurance every day.

Because I've seen a fair number of accident related claims in my career, you might consider the following things when deciding whether or not to add an ADB rider.

  • Is it cheap to add? If it doesn't cost very much to add, then I'd add it.
  • Can you afford it? If you can afford it, I'd consider it.
  • Are you at a greater risk of being in accident? If you ride motorcycles, travel a lot or are involved in other hazardous activities that aren't excluded in the policy, then I'd really consider it. In some cases, ADB riders actually pay an additional benefit if you die in a common carrier accident.
  • Are you otherwise uninsurable? If you pick up some life insurance through work and max out what you can get without any medical questions, an ADB rider might allow you to bump up your life insurance in the event of an accident. This would be life insurance you might not have gotten any other way. Remember though, if you do die by natural causes, then of course the ADB will not pay a benefit.

As always, you don't want to rely totally on accidental death benefits. As I mentioned above, you are more likely to die of natural causes than by accident.

Any accidental death benefit payment is just extra to help your beneficiaries.

Conclusion


Over the years, my stance on the accidental death benefit rider has changed from thinking you should never add it to considering it.

One of the reasons why is because I've seen many accidental deaths occur over the years.

Remember though, that accidental death coverage (either in ADB rider form or stand alone policies) is no substitute for life insurance that pays whether you are in an accident or of natural causes. 

Also, if you need some individual life insurance, and want to help support this site, why not let me be your life insurance agent. Click the red button just below or click ask for a proposal.

Wednesday, April 04, 2018

Two Types of Waiver of Premium Benefit Rider

Waiver of Premium

The waiver of premium rider isn't something I used to talk about very much. However, one day I got a phone call from a lady whose husband had a life insurance policy with me.

She explained to me that her husband had been working on the roof of their house and fell. My first thought was that he had died in an accidental fall but instead she told me he broke his back and was paralyzed. She had heard of waiver of premium before and wondered if he had this option on his policy.




Unfortunately, he didn’t have waiver of premium.

In this particular case, if he had added the waiver of premium to his policy, his premiums would have been paid for the rest of his life. But since he didn’t have it, he’d have to continue making his premiums.

This would be a lot harder to do now that he couldn’t work.

After my conversation with her, it reminded me to make sure everyone knows about the waiver of premium rider when they buy a policy from me. I then let them decide for themselves if they want to add it.

So, in this article, I wanted to talk about what waiver of premium is, the two different types of waiver of premium offered and in general how it works.

What is waiver of premium?


Waiver of premium is a rider you can add to your life insurance policy for an additional premium. If you are totally disabled and qualify, the insurance company may pay the premium for you.

What is the difference between waiver of premium and total permanent disability benefits?


It's easy to get confused between waiver of premium and a disability income benefit. The difference is that waiver of premium only pays your life insurance premium. A disability policy pays you a portion of your income in the event of a disability.

Two types of waiver of premium


There are two type of waiver of premium available. The difference between the two types is who has to get disabled in order for the waiver of premium to pay a benefit.

Here are those two types:

  1. Insured Waiver of Premium The first type of waiver of premium is if the insured gets disabled. For example, you buy a policy on yourself and add waiver of premium. In order for the waiver to pay a benefit, you as the insured have to be the one with the disability.
  2. Payer Waiver of Premium The second type of waiver of premium is called payer waiver of premium. This is sometimes called payor waiver of premium. No waiver benefit would be paid if the insured gets disabled. You as the payer would have to be disabled in order to qualify. This is usually used in case you buy a policy on a family member like your spouse or a minor child and are the person paying the premiums.

I see payer waiver of premium offered more in the workplace than individually. That's because if you buy life insurance through work and you get totally disabled, you - the payer - are still required to pay the premiums.

How long will the insurance company "waive" or pay the premium?


The length of time the insurance company will pay your premium while you are disabled varies from policy to policy. If you qualify, it could be just for a limited time or for the life of the policy.

What is the waiver of premium waiting period?


If you are disabled, waiver of premium doesn’t kick in right away. You usually have to wait at least 6 months before you can apply. You’ll have to continue paying the premium until you do qualify.

The waiver of premium benefit is designed for situations that involve a total disability. This means if you hurt your shoulder and are only disabled for a couple of months, you won’t qualify for payment under a waiver of premium rider since it didn't last longer than 6 months.

Is there a pre-existing condition clause or other limitations or exclusions?


For a disability due to a medical condition, there may be a pre-existing condition clause. Keep in mind, that a pre-existing condition may prevent payment.

It's possible that their could be other exclusions and limitations. A good example might be a self inflicted injury. These are things you'll want to find out.

Group life insurance and waiver of premium at work


If you have group term life insurance, a waiver of premium benefit may be available. You'd want to check the group certificate to see if and how it's covered.

Read the actual waiver of premium provision in the life insurance contract


A waiver of premium provision will be different from insurance company to insurance company. The only way to find out what your waiver of premium benefit would cover is by reading your contract.

Whenever in doubt about how any provision of an insurance contract works, you have to read the policy.

Is the waiver of premium benefit worth it?


Whether it's worth it to add the waiver of premium benefit depends on several factors and how old you are.

Here are some things I would look for:

  • Are you concerned about becoming disabled? Are you at a greater risk of becoming totally disabled either because of medical conditions or your activities? Here's and article that talks about the chance you'll become disabled and other risk factors.
  • How long will the waiver of premium benefit period be? You'll have to look at the contract to see how long the benefit period would be in the event of disability.
  • How old are you now? Waiver of premium may only be available for certain ages. You might not be able to add it or if you can, it might have a limited benefit.
  • How much does it cost? How expensive is the waiver in relation to the premium? Can you afford the extra premium?
  • Can you afford the base life insurance premium if you get totally disabled? Do you have enough money to pay the premium if you did get totally disabled?
  • Do you have other disability insurance? Do you have long term disability insurance? How long would it last and how much would it pay?

You'll want to read the waiver of premium benefit provision in the life insurance policy you buy. You can either do this by reading a policy specimen your agent can provide before you buy it. Or, you can read the provision in your policy after you get it to see how it works for sure.

Can I add waiver of premium or drop it later if I want to?


I often get asked if you can add waiver of premium (or other riders) later after you have already bought your life insurance policy. The answer is usually no.

You can always drop a life insurance rider through a contractual change down the road. If you aren't sure, I'd lean toward adding any riders you are interested in at the time you buy the life insurance.

You can always evaluate it closer after you get the policy.

Conclusion


It's hard to know for sure what will happen in the future and whether you'd need the waiver of premium rider if you bought it.

For the lady who called me about her husband, he and his wife would have been grateful had he added the waiver of premium benefit.

The main thing that I always think is important is to talk about all the options you have when you buy a life insurance policy. You can't make an educated decision for options you don't review.

Hopefully that helps you understand the waiver of premium rider a little better. Let me know if have any questions in the comments or if you have had to file for a claim under a waiver of premium rider.

Also, if you need some individual life insurance, and want to help support this site, why not let me be your life insurance agent. Click the blue button just below or click ask for a proposal.

Thursday, March 29, 2018

How Do Life Insurance Loans Work?


If you ever wondered how do life insurance loans work, you aren't alone. In fact, I got a call today from a policyholder who was thinking about borrowing some money from his policy. But, like a lot of people, he wasn't sure how borrowing against his cash value worked and he had some questions. It reminded me that I hadn't written about policy loans yet. I thought it would make a good topic to explain since so many people have questions about it.




What are Life Insurance Policy Loans?


Permanent life insurance policies build a cash value. As that cash value starts to build, if you want the money, you only two choices. The first option is to cash the policy in. But if you do that, then you lose your life insurance for good.

The second option is that the insurance company will let you borrow a portion of that cash value. The advantage here is that you can keep the life insurance policy in force but still use some of the money for whatever you might need it for. That way your beneficiary would still receive something if you'd happen to die.

How Much Can I Borrow from my Life Insurance Policy?


The amount of money you can borrow depends on how much life cash value you have accumulated in your policy. Cash value only accumulates in a permanent life insurance policy. So if you have a term life insurance policy, you won't be able to borrow against it.

If you do have a permanent policy, the amount of cash value you have in your policy is a function of two things. The first is, how long have you had your policy. If you haven't had your policy very long, you won't have very much if any cash value built up yet and you won't be able to borrow any money. The longer you have it, the more likely you'll have cash value to borrow.

The second factor in how much you borrow is how much you pay in premiums. The larger your premiums, the larger the cash value will grow. The smaller they are, the less it will grow.

Combining the two factors, the longer you've had your policy and the larger your premium, the more you'll cash value you'll build up.

Each year, the life insurance company will mail you a statement that shows you much cash value you have.

While you can't borrow the full amount, you can borrow a large portion of it. Maybe 80-90 percent of the available cash value.

When you decide to borrow money from your policy, a quick call to the insurance company is all it takes to find out the exact amount. There's no need for a fancy life insurance loan calculator. You just call them up.

How Do I Pay the Loan Back? Do I Have to Pay It Back?


The great thing about a life insurance loan is that while you can pay the loan back, you don't have to pay it back. If you never pay the loan back, the insurance company will eventually get their money back when you die by subtracting it from the life insurance face amount.

But, while you don't necessarily have to pay the loan back, it's still a good idea to consider doing so for a couple of reasons.

The first reason is that after a loan is repaid, if you need to borrow it again, you could do that. The second reason is that if you have a universal life policy, an outstanding loan could underfund it. I've gone into greater detail about the problems with underfunded universal life insurance in the past.

I guess if you have a dividend paying traditional whole life policy, there is potentially another reason to pay the loan back. That is if you have a direct recognition policy that reduces your annual dividend while a loan is outstanding. I don't think that has as much impact as most insurance agents might think.

Even if you don't pay the loan back, one thing I'd be certain to do is to pay the interest on that loan each and every year.

Let's talk about the loan interest.

Make Sure You Pay the Loan Interest Each and Every Year


After a loan is taken out against a life insurance policy, you are then charged interest on the amount of money borrowed. The amount of the interest depends on the insurance company. Some insurance companies have fixed loan interest rates while others have variable loan interest rates.

What's common to all life insurance companies is that they do charge interest.

Each year around your policy anniversary date, the insurance company will send you a bill for the amount of interest due.

You want to make sure that you pay that interest. If you don't pay the interest, then it's added to your loan and capitalized. That's a fancy way of saying you'll have to pay interest on the interest.

The problem with doing that is that it could eat away at the cash value of your policy and cause your policy to lapse or terminate.

How Does a Loan Affect My Life Insurance Premium?


Your premium remains the same. It still needs to paid while the loan is outstanding. Otherwise, your policy will eventually lapse.

Avoid Borrowing Money from Universal Life Insurance Policies


If you have read any of my stuff, you know that I am not a big fan of universal life insurance policies. That goes double if you borrow against the cash value.

It's my opinion that a lot of universal life insurance policies are just a problem waiting to happen.

When you borrow against universal life policies (and if you neglect to pay the interest), I think that the universal life policy will just lapse sooner than it would.

I would limit my borrowing to only from whole life insurance policies. I would avoid ever borrowing money from a universal life insurance policy.

I wouldn't buy a universal life insurance policy in the first place.

Are Life Insurance Loans Taxable?


Loans from your life insurance by themselves are not taxable. Theoretically, I suppose if your life insurance policy lapsed with an outstanding loan, it might be taxable if the amount you had received from the loan was greater than the premiums you had put into it. As with all tax questions, check with your tax advisor.

Loan Repayment Tips


I don't have any stats, but it's my guess that the vast majority of people who borrow from their life insurance policy never pay it back. Of those, I'd be willing to wager that a large percentage don't pay the interest every year.

Keep in mind that you can pay the loan back at any time.

While the ideal system would be that you'd set yourself up on some sort of repayment plan, you might not be inclined to do that.

In it's place, what I suggest that you do is set up your online bill pay to send money to the insurance company automatically each time you get paid.

What Steps Do I Need to Take to Borrow the Money?


OK. So you decided to borrow from your life insurance. What's the next step. Just call up your life insurance company and they'll take care of it. In most cases, if you are the owner of the policy, you can do it right over the phone.

There will be times, you might have to fill out some paperwork to get the loan. In most cases, this is just to verify that it's really you taking out the loan.

Once you've put in the request, most likely in a few days you'll have a check in your hands.

Conclusion


Hopefully, that helps answer your questions about how life insurance loans work. They can be a good tool if used properly. Try not to borrow from universal life insurance policies. Pay your interest each year and try to pay back your loan.

Have any questions I didn't answer? Let me know in the comments.

Also, if you need some individual life insurance, and want to help support this site, why not let me be your life insurance agent. Click the blue button just below or click ask for a proposal.

Wednesday, March 28, 2018

10 Steps to Organize Your Life Insurance Paperwork Completely


Over the years, I’ve talked with a lot of people about their life insurance. The one thing that stands out is that most people know they have some life insurance but don’t know much about it. In this article, I’m going to show you how to organize your life insurance paperwork so that you'll know what you have and also have it in one place.




Make a list of all the people in your family


The first step is to make a list of each person in your family that you could potentially be responsible for if they died. For each person, you want to list their name, relationship, date of birth, tobacco use and overall health.

I include tobacco use and health so you’ll have some idea of whether if needed, they could qualify for life insurance. You'd also know if you are ever presented a guaranteed issue offer who might need it.

Let’s do an example. Let’s say you are married, have three kids, a grandchild and your wife helps her mom manage her money. Your list might look something like this.

  • John Doe, Self, Date of Birth, No tobacco, Type 2 
  • Mary Doe, Spouse, Date of Birth, No tobacco, Healthy
  • Jeff Doe, Son, Date of Birth, No tobacco, Asthma
  • Jane Doe, Daughter, Date of Birth, No tobacco, Healthy
  • Sally Doe, Daughter, Date of Birth, No tobacco, Healthy
  • Jessica Doe, Granddaughter, Date of Birth, No tobacco, Healthy
  • Samantha Doe, Mother-in-Law, Date of Birth, No tobacco, High blood pressure

Your list might only have one person on it. If so that’s ok.

Your list might be longer. Maybe you have a bunch of kids and grandkids. And while you think you might not be responsible for them, if the worst does happen and your kids need help, remember they might ask you for help.

Believe me, it happens everyday so you have to be ready.

After you’ve made this list, move onto step 2.

Identify all the life insurance your family has inforce


Next, for each person in your family, you want to identify all the life insurance each person has both at work and individually.

To help you figure out what life insurance everybody has, here’s a list of things to consider to help jog your memory.

  • Life insurance at work This would include any basic group term life insurance, supplemental term life insurance, spouse or dependent life insurance and any other life insurance that is payroll deducted from a family member's paycheck.
  • Individual life insurance policies This would include any term life insurance, universal life insurance, whole life insurance or any other type of life insurance like accidental death insurance.
  • Life insurance another family bought for someone Don't forget about any policies a parent might have bought for you or for your children.
  • Child term life insurance riders These could be either at work or included with your individual policies.
  • Credit life insurance This could be any life insurance you bought when you took out a mortgage, car or credit card.
  • Life insurance through any association or union If you are union member or member of any type of organization, check and see if you have any life insurance through that group.
  • Life insurance offered through any bank or credit card accounts If you have any type of life insurance through any financial institution.
  • Life insurance connected to any retirement plan Sometimes retirement arrangements where you work might provide some life insurance.
  • Any other life insurance out there You might discover you have some life insurance with someone else. Maybe life insurance purchased by your employer for key person insurance or some sort of buy sell agreement.
After you've brainstormed all the possible life insurance policies you and your family have. It's time to make a simple list of these policies.

For now, just list the name of the insured, type of life insurance and the amount. Here's a sample list for you to see as an example.
  • John, Basic group life insurance, $40,000
  • John, Supplemental group life insurance, $150,000
  • John, Individual term policy, $500,000
  • John, Universal life, $100,000
  • Mary, Individual term policy, $200,000
  • Jane, Individual whole life, $10,000
  • Sally, Individual whole life, $10,000
Once you have each life insurance amount listed. It’s time to go on to the next step.

Make a spreadsheet for group term life insurance policies


Group life insurance is life insurance you get through work. Keep in mind that not all life insurance you get through work is "group" life insurance. Any individual life insurance you pick up through work that you pay through payroll deduction will go on your individual life insurance spreadsheet. You won't list any individual life insurance that you actually own on your group term life spreadsheet.

Generally, this will be just three types of life insurance. Those are basic group term life insurance, supplement group term life insurance and any group accidental death.

For every person in the family that you are responsible for, list the details of the group term life insurance plans they have where they work.

In your spreadsheet, you want to list and track the following items.
  • Insured - who is covered
  • Face amount - how much is the life insurance
  • Type of life insurance - is it basic, supplemental or accidental death
  • Have copy of group certificate - do you have a copy of the group certificate
  • List of riders - what riders are attached to the policy
  • Primary beneficiaries
  • Contingent beneficies
  • Employer
  • Human resources contact
  • Convertible - can you convert it to a whole life policy
  • Portable - can you keep the term insurance when you leave the employer
  • Attained age or issue age rates - do the rates increase as you get older or do you keep the starting age.
  • Age reduction schedule - does the life insurance decrease when you reach a certain age
  • Premium - how much does the life insurance cost
  • Payroll frequency - how often does the premium get deducted from you paycheck
  • Insurance company 
  • Phone
  • Website
Of all the things listed above, the most important thing is probably the group certificate. That's because the group certificate has the right answer in it (if you are given the right one). The second best resource is an employee benefit guide if you have one.

The human resources department of the employer is another place to check. Sometimes though, without the group certificate, you are often guessing as to how the plan works. It's pretty common for people to repeat what they've been told by the agent only to find out the agent wasn't correct.

Just do the best you can. Your family doesn't own the group insurance anyway along with a list of other problems. What it is today may not be what it is tomorrow. You'll want to update it when anyone changes jobs.

A good place to create these spreadsheets is by using a google spreadsheet.

Once you've got a completed the details of the group term life insurance spreadsheet, print it out so you can keep in a file.

Make a spreadsheet for individual life insurance policies you own


Next up, you want to make a similar spreadsheet for each policy that you own and control. Just like you did for the group term life insurance, you'll want to do this for every member of your family as well.

Here are the details I'd track down for all of your individual policies.
  • Insured
  • Face Amount
  • Policy #
  • Type of life insurance - term, whole life, universal life, accidental death
  • Issue date
  • Have policy?
  • Outstanding loan
  • Dividend option selected
  • Life insurance riders
  • Conversion option
  • Owner
  • Contingent owner
  • Primary Beneficiary
  • Contingent Beneficiary
  • Premium
  • Premium mode
  • Payment method
  • Tobacco rating
  • Medical rating
  • Insurance company
  • Phone number
  • Website
  • Agent
  • Agent phone number
  • Agent website

The best place to find this information is in the life insurance policy and paperwork you got from the insurance company when you bought the policy.

I like to find things in the contract because the contract is what decides everything. If you have trouble finding it, figuring it out, or anything like that, put a call into your agent or the insurance company if you don't know who your agent is. Ask them for what you need and they'll answer your questions and send anything to you that you need.

Next, you'll want to print out the spreadsheet and begin collecting all of this information in one spot.

Create a physical file for life insurance papers


What you want to do now is create a physical life insurance file. I like to use a file folder but if you want to use a more cool organizer, feel free to do that too.

Whatever you use, you want to keep the following:

  • The print out of the group term life insurance spreadsheet you made
  • The print out of the individual life insurance spreadsheet you made
  • Each life insurance policy
  • Any sales material provided at the time you bought the policy
  • The illustration used to show you how the policy works
  • Any annual statements you receive
  • Other correspondence and confirmation from the insurance company like beneficiary changes, ownership, changes and so on.
  • Each group insurance certificate if you obtain it (sometimes you can't)
  • Employee benefit guide
  • Annual benefits confirmation statement
  • Any other papers that document life insurance coverage. A loan document with a credit life purchase listed for example.
As you are putting each of these files together, you'll notice you don't have everything you need. That's totally normal. Even I was missing some life insurance policies and statements when I put my information together.

That's where the next step begins.

Make a list of missing items and things you need to change


While you are gathering everything, you may notice that you are missing a policy on someone. Or, that you can't find your annual statement. 
  • Request John's universal life policy
  • Obtain the last annual statement for John's universal life policy
  • Call employer to see if I can get a copy of the group certificate
  • Find benefit book from work that explains the life insurance
  • Change beneficiary on Sally's policy
  • Check to see if policies on kids are whole life or term
  • Check to see if Mary's policy is still inforce
  • Confirm old policy I found is lapsed
Whatever you notice that's missing from the spreadsheet, make a to do list like this one to remind you of what you need to do and start working on it to complete your file.

Getting organized is the first step. Later, you'll be needing these items to figure out exactly what you have and what steps you should take to round out your life insurance program.

Contact the insurance companies to get missing documents, information and forms to fix items


Once you have your list of missing items, it's time to start calling the insurance companies. Here's a sample of the things I'd focus on when you call.

  • Request missing policies If you are missing any policies, ask them to send you a duplicate. Some insurance companies may charge a fee for duplicate policies and offer to send a policy certificate instead. 
  • Confirm your beneficiaries are set up right Verify your beneficiaries and make sure that you have both a primary and contingent beneficiary. If there's any question about your beneficiary, go ahead and submit a new beneficiary change to make sure it's correct.
  • Name a contingent owner on minor's policies If you own a policy on a child, arrange to name a contingent owner in case something happens to you. 
  • Clarify any missing details in your spreadsheet If there was anything you didn't know when filling out your spreadsheet, ask for that information. For example. what riders are part of your policy, etc.
  • Correct any personal information that is incorrect Make sure your name, address and phone is correct. Has any owner, insured or beneficiary changed their name or moved. Update this information with the insurance company.
  • Request missing annual statements If you don't have your last annual statement, request it.
  • Automatic premium loan If you have a permanent policy, ask what if automatic premium loan is selected.
  • Review payment methods Make sure you know the premiums, and when they are due.
  • Request removal of tobacco rating If you used to smoke and have stopped, ask for a removal of the smoker's rating.

Once you've completed your list, follow through on making the changes that need to be in writing. Confirm you have received everything you requested.

Be sure to update your spreadsheet with any new information you find out.

Put insurance company and agent contact information in your smart phone


You should have everything pretty well organized at this point. The next thing I would do is put each insurance company's and agent you deal with name and phone number in your smart phone.

That way it'll be there when you need it.

Set up automatic payments through electronic funds transfer or online bill payment


If you manage your checking account well, most insurance companies will set you up on automatic drafts from your checking account. If you prefer, you can also use the online bill pay option to send payments when due.

I personally use a combination of these two payment methods.

By doing this, you'll make sure that your premium payments get to the insurance company when they are due so your coverage doesn't lapse.

Add premium due dates, draft dates and amount as recurring events in your calendar


For each policy that you pay on, list the payment details in your calendar. This is what makes digital calendars great because you can add them as recurring events so they will automatically show up each month to remind you the premiums are due.

I like to follow this format:

  • Life insurance company name $124.95 EFT

In that example it was an automatic draft out of a checking account.

Then you won't forget any premiums when they are due. Assuming you look at your calendar!

Put all of this information in a safe place


Now that you have made these lists and created a file to put all of it in, find a safe place to keep it. 

I personally like to keep my lists in my phone. I like to keep my files in my office. If you want to put your policies in some sort of fire proof safe, you can always take that step as well.

Bonus Step: Set up online access and smartphone apps


Many insurance companies give you the ability to access your life insurance policies online. If they do, register for online access for each policy. Some insurance companies are more technologically advanced than others.

So just check and see what's available and take advantage of whatever they offer.

Conclusion


OK. There you have it, the first step in getting a handle on your life insurance is getting organized and identifying everything you have.

Only then can you figure out what you need to do set up your life insurance properly.

Let me know in the comments if you have any suggestions or questions.

Also, if you need some individual life insurance, and want to help support this site, why not let me be your life insurance agent. Click the blue button just below or click ask for a proposal.

Tuesday, March 27, 2018

How to Avoid the Underfunded Universal Life Insurance Trap


A while back, a family member of mine bought a life insurance policy they thought was going to last their whole life. They paid the premium the insurance company told them to pay when they got the policy. They never missed a premium. They paid on this policy for 10 years.

However, when they reached 65 years old, they got a letter from the insurance company that let them know the insurance company would have to raise the premium because there wasn’t enough cash value in it. Since they couldn’t afford the premium, they had to let the life insurance policy lapse.

The end result?

Essentially, the life insurance company got out of the life insurance even though my family member did everything they were asked to do.

The sad thing is that his isn't an isolated case. Here's a story in Forbes, another one in the New York Times and yet another in InsuranceNewsNet.com. These articles and many others I found detail the same problem.

I call this problem the underfunded universal life insurance trap.




What is the Underfunded Universal Life Insurance Trap?


The underfunded universal life insurance trap is when the insurance company creates a life insurance policy that transfers interest rate risk from the insurance company over to the policyholder.

Interest rate risk is when the rate of return isn’t high enough to support the policy for life. And when there isn’t enough money, the insurance company eventually asks you to pay more money to them (like happened to my family member above).

In exchange for accepting the interest rate risk, the insurance company allows the policyholder to pay a lower premium. In most cases, this lower premium “underfunds” the policy almost guaranteeing that it will not last for life.

The problem is that most people don’t know they’ve assumed this risk when they buy a universal life insurance policy until years down the road. By the time they find out, they are much older, maybe in their 60’s and 70’s.

When faced with being forced to cough up more money, most people opt not to and just let the policy lapse.

What Causes Underfunded Policies


There are five reasons you might have an underfunded policy. Let's talk about each of those.

  1. Premium too low If the premium is the lowest the insurance company will accept, there's a good change it'll be underfunded down the road.
  2. Not paying your premium If you don't pay your premium, then your policy will eat away at the cash value and cause it to be underfunded.
  3. Borrowing against the universal life cash value If you borrow from the cash value, you increase your chances of underfunding (especially if you don't pay the interest).
  4. Returns too low If you don't earn a high enough return, there will be less money in the policy. This creates an underfunded situation.
  5. Cost inside the policy have increased If the insurance company increases the costs inside the policy, it will also increase the likelihood the policy will be underfunded.

The biggest problem I see is that most people pay the minimum required premium. The other causes of underfunding make the problem much worse.

How to Tell if You Have an Underfunded Universal Life Insurance Policy


If you have a universal life insurance policy, obviously you need to take a closer look at it. To find out if your policy is underfunded, there are three things you can look at to start the process of figuring it out.

Those places are:

  1. The sales illustration provided when you bought the policy The illustration should provide additional details on what to expect from the policy.
  2. The life insurance policy The policy will you give you more information into what premiums are needed to keep the policy inforce.
  3. The annual statement The annual statement usually says how long the policy will stay inforce under the current assumptions. Figure out how old you’ll be and that’s how long the policy will stay inforce.

I always thought the annual statement is the easiest place to find out if your life insurance policy is underfunded.

Actual Example of an Underfunded Universal Life Insurance Policy


A couple of years ago, my wife’s employer offered a universal life insurance plan to their employees. The offer was guaranteed issue which means we could get the life insurance without any medical questions.

As you can probably guess, I’m not big on universal life insurance but since my son has a medical issue, I told her to sign up for it.

After we got the policy, I read it carefully and found the following language:

  • Based upon guaranteed maximum cost of insurance rates (the highest rates We may charge) and the guaranteed minimum interest (the lowest interest rates We may credit), coverage will expire before the Final Policy Date unless premiums in excess of the Minimum Premium Due at Issue are paid.

The language right in the policy warns me right up front that I might need to pay more than what the insurance company pays.

When you read language like that, I think it’s important to realize that you will most likely pay more than you are being told you have to pay now.

There's also the very real danger that years down the road, you may lose that policy.

Steps to Avoid Losing Your Life Insurance When You are Older Because it's Underfunded Now


Now that you know how to identify this problem, let's talk about a few things you can do to avoid this problem

  1. Don't buy universal life insurance Unless you know what you are buying just don't buy it. Most people have no clue that they may have problems with their universal life policies down the road. I never offer universal life insurance to anyone for purchase.
  2. Pay more than the minimum premium Look at your life insurance documents to identify the best premium to pay and then pay that. For my son's policy I talked about above, that meant I needed to pay about $100 more per year than what the insurance company told me I needed to pay.
  3. Pay every premium on time If you don't pay your premiums, then a universal life insurance policy is almost guaranteed to fail down the road.
  4. Review your policy annually When that annual statement arrives each year, evaluate if you have to put more money into the policy. The best way to do this is take a look at the illustration you received when you bought the policy. If the value you are supposed to have is less than what you actually have, then pay that difference then.
  5. Don't borrow against the universal life policy Never borrow against a universal life policy.
  6. Buy whole life insurance instead of universal life insurance if you want permanent coverage If you really want a permanent life insurance policy that lasts your whole life, then buy a whole life policy which moves the interest rate risk back to the insurance company where I think it belongs. Here's a video I did that talks about the difference between universal life and whole life insurance.
  7. If you can't fund your universal life policy properly, consider buying term insurance instead If you don't fund a universal life policy properly, it'll lapse at some point. If it's going to lapse, then it's basically an expensive term policy. You'd be better off buying a term policy in that scenario.

These tips won't guarantee you that you won't have an underfunded policy but they will lessen the risk of it being a problem. The key is you have to really stay on top of your policy every year and fund it properly.

In addition to that you also want to avoid a huge list of other life insurance mistakes as well.

Conclusion


If you can't tell, I dislike universal life insurance policies. That's because the life insurance companies transfer interest rate risk over to you, the policyholder.

There's a reason that insurance companies transfer that risk over to you. That's because insurance companies aren't stupid. They don't want to take on that risk.

You have to ask yourself this.

If the insurance company is an expert on risk, and they don't want to accept that risk, why do you think you should? 

The answer is you shouldn't.

Stick to term and traditional whole life insurance instead.

Let me know in the know in the comments if you have any questions.

Also, if you need some individual life insurance, and want to help support this site, why not let me be your life insurance agent. Click the blue button just below or click ask for a proposal.

Sunday, March 25, 2018

The Huge List of Life Insurance Mistakes (to Avoid)


I thought it would be a good idea to write up the list of common life insurance mistakes I see people make and how to avoid them. I've seen other "lists" of mistakes online but I've never thought that they were quite complete enough. While I was making this list, I decided to organize these mistakes into three categories. Those three categories are mistakes made before, during and after you've bought life insurance. It's my hope that my list will help you do a more complete job in checking over your life insurance. For additional help, you can also check my life insurance guide.




Mistakes to Avoid Before Buying Life Insurance


In this first section, I wanted to share with you the mistakes I see people make before they have ever bought life insurance. In many cases, some of these mistakes are more of what I see as attitudes or perceptions about life insurance more so than mistakes. In any case, I think they are important to list here whether you agree with me or not.

  • Not owning any life insurance At the beginning of my list is not owning any life insurance at all. Most of us have some group term life insurance through work. You don't control that life insurance though. You should probably also have at least some life insurance that you own personally outside of work. See having enough insurance for a funeral below.
  • Relying on the group life insurance you get at work Most of the life insurance you get through your employer will end at some point. It will end either when you leave employment or at a certain age. The problem is that most of us live a lot longer than that. I'm still a fan of group life insurance but I go over a list of the problems with group term life insurance here
  • Thinking the life insurance policy your parents bought for you when you were a kid is all the life insurance you'll ever need I often talk with people in their 40's and 50's who say they have life insurance and don't need any. When I dig a little deeper, I often hear that the life insurance they do have is what their parents got for them when they were kids. They've never updated or even looked at additional life insurance in decades. While I do run across people whose parents have picked up a significant amount of life insurance for them when they were younger, it's still a good idea to consider increasing your amount. Over time inflation makes it important to add to it.
  • Not having life insurance in an amount at least enough for a funeral Unfortunately, everybody is going to die at some point. When you die, you have to pay for some sort of funeral. The responsible thing to do is to at least have enough life insurance to pay for your funeral so others don't have to. You might be fine having your body buried out back in a pine box, but I'm not sure if that's even legal. So in the end, your family plans a funeral. I have heard many stories of family members having to pitch in and pay for funerals out of their own pockets. It's a financial shock for family members to have to pitch in to pay for your funeral. Some people end up setting up payments with the funeral home and if they don't pay may even get taken to court.
  • Not having life insurance on your children or other family members for an amount at least enough for funeral Many people don't buy life insurance for their children. While there is a low probability that something will happen to your kids, it's better to be safe than sorry. If the worst happens, there still needs to be a funeral. The people I have talked with that have gone through it, can't stress enough how important is. The same is true for spouses or other family members.
  • Not having enough life insurance If you have a young family, a $125,000 mortgage, two car payments and only have $20,000 in life insurance, you probably are underinsured. You should consider picking up more life insurance. Also read my post on how much life insurance do you need?
  • Waiting too long to buy life insurance The longer you wait to buy life insurance, the higher the premiums will be due to your age or health problems. Also, since you have to qualify for life insurance, if you lose your ability to qualify due to health problems, you may not be able to get any. I talked with someone the other day who's parent died without any life insurance because they waited until they were extremely ill to buy it and just couldn't get it.
  • Not believing in life insurance One phrase I hear from time to time is that people don't believe in life insurance. With the number of GoFundMe fundraisers for funeral expenses that I see, it's a shame that at least enough life insurance to pay for a funeral isn't purchased by everyone. I'm sure that if you are on the paying end of someone who didn't believe in life insurance, you become a believer really quick. I can't count the number of people who've told me they had to pay for a funeral because the person who died didn't believe in life insurance. Needless to say they weren't to happy about it.

Like I said above, I'm not sure whether everyone would agree that all of these would qualify as "mistakes" because everyone is different, I definitely think they are worth thinking about.

Let's move on to mistakes I see that people make when they buy life insurance.

Mistakes to Avoid When Buying Life Insurance


Once you've decided to buy some life insurance, there's a chance you might make more mistakes. Here are some of the most common mistakes I see during the buying process.

  • Buying life insurance without an agent Let's face it. Life insurance agents have gotten a bad reputation because some of them have used some questionable sales tactics. A lot of people are afraid to meet with an agent and use their services. First, it's important to note that whether you use an agent or not, your premium is likely to be the same. The other thing that is important to note is that if you fill out the life insurance application on your own without an agent, I've heard of insurance companies denying claims because the application wasn't accurate at the time of application. Since it doesn't really save you any money to go direct, then as a safeguard, I'd still recommend working with an agent. That way, you'll have a person you can ask to help you if you need it.
  • Not taking advantage of guaranteed issue when you should Occasionally, I see offers people in the workplace turn down offers for guaranteed issue life insurance. Guaranteed issue means you don't have to answer medical questions. I've seen people who couldn't get life insurance any other way turn down a great offer they'll never get again.
  • Lying on the life insurance application (or application for re-instatement) I'm often asked by people what if they lie about an answer to a question on a life insurance application. If I had to guess, I'd say the most common thing that people consider lying about is tobacco use. There are a lot of smokers out there who don't really consider themselves smokers even though they smoke all the time. As an agent though, I have to remind people to always be honest on your life insurance application. Otherwise, the insurance company may deny a claim if they find out and you don't want that to happen.
  • Not preparing properly for the life insurance exam For policies that require you to take a medical exam, you want to make sure that you make sure to follow some common sense rules. You don't want to hurt yourself by doing poorly on an exam you could have done better on. I once had a applicant go partying and drinking binge the holiday weekend right before he took his exam. Of course, his blood work was all out of whack and his exam results increased his premium. Just keep in mind, try and keep your diet clean and body rested before you take an life insurance exam. This isn't the time to experiment with smoking pot for the first time for example (or anytime for that matter!)
  • Buying the wrong type of life insurance One of the more popular pages on my website is one that discusses accidental death. It's visited by people who want to know if they will get paid from an accidental death policy. Sometimes people buy accidental death only policies by mistake not knowing that they won't pay if you die of an illness. Then there is the old debate between term and whole life.
  • Not setting up the life insurance options correctly A life insurance application is a multi-page document with lots of detailed information to fill out. It's easy to overlook some common options you want selected.
    • Free additional riders Be sure that any riders that don't cost you anything are added to the policy. It's easy for an agent to overlook adding an option you might want added. If there is no charge for it, then there is no reason not to add whatever is available. Sometimes, it's overlooked.
    • Contingent owner You might want to name a contingent owner in some cases. A good example would be when you have a life insurance policy on a minor. If something happens to you, you might want to name a specific adult to be the owner. This will make sure that the person you want managing it will.
    • Automatic premium rider If you have a permanent life insurance policy, you'll want to select yes for the automatic premium loan option. This will provide a safeguard if you can't pay your premium for a reason like being sick and unable to take care of your bills.
    • Dividend options If you have a whole life policy, make sure you choose the right dividend option. There are five dividend options you can choose from.
  • Not considering conversion options when buying term insurance When you buy a term policy, it's a good idea to have a conversion option available. A conversion option allows you to change a term policy to a permanent policy. You want to make sure that the options you have to convert to are just as quality as the term policy you started with.
  • Owning your life insurance in your own name Owning your own life insurance in your own name can cause a couple of problems.
    • Potential estate tax While life insurance death benefits are income tax free, they are not estate tax free. Anything you own, including life insurance is considered part of your estate for estate tax purposes. With the recent tax changes, I'm not sure this is still an issue but it could be.
    • Impact on medicaid qualification If you are looking to qualify for medicaid, then any life insurance you own may have to be surrendered.
  • Making mistakes with your beneficiaries There are three mistakes people make when naming beneficiaries. Those are:
    • Naming your estate You always, always, always want to name a direct beneficiary. Payments made to a direct beneficiary pass outside your estate outside the hands of creditors. If it goes into your estate, your beneficiaries have to wait until your estate is settled before they get the money which could be months or even years down the road. Life insurance claims are paid as soon as the insurance company processes your claim.
    • Naming a minor You want to try and avoid naming a minor as a beneficiary. Minors have to have someone appointed to manage their affairs. This is even more important if you have children from a previous marriage. Since it's pretty common for people with younger children to also not have made a will, it's a possibility an ex could be in control of money for your children when you didn't want them to be.
    • Not naming a beneficiary If you don't name a beneficiary, it will go to your estate.
    • Not naming a contingent beneficiary You always want to list a back up beneficiary in case your beneficiary dies at the same time as you or before you to keep your death benefit from going into your estate.
    • Not telling your beneficiary you have named them as beneficiary From time to time, people don't know who is listed as the beneficiary to a policy when someone dies. This leads to confusion and sometimes anger over what in the world you were thinking when you named someone else beneficiary.

That's a pretty long list of things to watch out for when you are buying life insurance.

Now, let's move on to the next set of mistakes.

Mistakes to Avoid After You Buy Life Insurance


Once you own some life insurance and it's in place, here are some other mistakes that could potentially occur. Be sure and read through these to make sure you aren't making any of these mistakes. 

  • Not making sure your life insurance policy was delivered If you buy an individual policy, you should receive a policy. This policy will either be delivered by the agent or by mail. You want to make sure that you receive a policy so you can review it. We bought an individual policy on my son from where my wife works five months ago and I still haven't received the policy. After getting no response from the agent who wrote the policy, I finally contacted the insurance company directly. While I was able to verify the coverage was inforce, the insurance company still has not sent us a policy so I can review it. You have to stay on top of it like I am to make sure you get a policy. Remember though, that you will not get a policy for group term life insurance. That's because you don't own anything there. This is for individual policies only.
  • Not reading the life insurance contract One of the reasons you want to make sure you get a policy when you should is so that you can read it. In the story I shared with you in the mistake above, the policy we bought on my son was supposed to be guaranteed issue and that's why we bought it. But I want to read the application attached to the policy to see if there were any medical questions. I also want to see if the policy was indeed a true whole life policy and not a universal life policy. These are things I won't know for sure until I actually read the policy. This is important because it doesn't matter what your agent tells you, it only matters what the contract says. You want to read it. At the very least, you want to make sure you verify your personal details are correct and that you got what you actually applied for both in plan and in amount. You also want to make sure your premium is correct and your beneficiaries are listed how you listed them. You'd be surprised how many times this stuff can be incorrect. If you don't pay attention, it might be too late to correct it. If you need help reading your contract, you should ask your agent or call the insurance company if you need to.
  • Not considering paying your premium annually If you have the funds to pay your premiums annually, you should consider it. This saves you money on the premiums, maybe close to a month's worth each year.
  • Not keeping the illustration you were given at the time of sale A key tool used to understand how a life insurance policy is supposed to work is called an illustration. You should keep this illustration (along with any other sales material you received). You want to keep the illustration so that you can compare the values you are supposed to have each year to what your annual statement actually shows they are.
  • Not keeping your policy documents properly organized and in a safe place Make sure you keep all of your life insurance documents organized and in a safe place.
  • Not requesting the removal of a tobacco surcharge if you quit using tobacco Sometimes people forget about asking the insurance company to remove a tobacco rating if they used to smoke or used other tobacco products. Every company is different, but in most cases if you have stopped for more than 1 to 2 years, you might be eligible to have that removed.
  • Not exercising guaranteed conversion options If you buy a policy with a guaranteed insurability rider, don't forget to check out what you can do when your options become available. Especially if you have health issues.
  • Not knowing what life insurance you have The most common answer people give when you ask them about their life insurance is that they know they have something, but don't know what it is. Most people also buy their life insurance and then never review it. Don't let that be you.
  • Not keeping your life insurance policies You should keep all the policies you own in a safe place. A lot of people toss them aside and never know where they are if they need them. While the policy isn't completely necessary if you have to ever file a claim, it certainly helps to have it on hand as proof if you ever needed it.
  • Not destroying lapsed policies Imagine keeping policies that had lapsed or been cancelled in your important papers and then your family finding them after you died. Then only to discover that they aren't inforce. Beneficiaries are left questioning the insurance company why they have policy if it isn't inforce. It puts everyone in an awkward spot.
  • Not reviewing your life insurance annual statement each year Most people get their annual statement from the insurance company, glance at it and just set it aside. But what you want to do, especially if you have a universal life policy, is compare the statement to the values you expected and saw on the illustration you received at time of sale. The best time to make up in short fall in value is right when it happens. So if you see less in your policy than what was supposed to be there, you might want to add more money right away. Not doing so puts your policy at risk later. The amount needed might be much higher later and you could lose your policy.
  • Failing to make required premiums I've ran across many people who have permanent life insurance policies who stopped making premiums. The policy stays in force because the premiums are being paid out of the cash value. This just eats away the value of your life insurance policy. If it's a universal life policy, it severely compromises it. It's a little easier to fix the damage with a traditional whole life policy.
  • Failing to change beneficiaries You'd probably be upset if your spouse forgot to change their beneficiary from an ex-spouse to you. But believe it or not, it happens. Don't forget to review your beneficiary arrangements if you get divorced or if you got married. Sometimes people forget to change the beneficiary from the parents or other family members to another spouse.
  • Not filing a claim Believe it or not, sometimes people die and a claim is never filed. It's not just the insurance company or agent that may not always be aware of the death of a policyholder. Beneficiaries sometimes don't know either. In fact, I got a call recently from someone who's called me two years after his wife had died. He had recently remembered it or found some paperwork that jogged his memory to check. We filed the claim and got it paid.
  • Underfunding universal life insurance policies Many people have universal life insurance policies and are paying a premium that is not sufficient to keep the policy inforce for your whole life. If this is you, unless you dig in to look at your policy now, you won't know until you are much older and get a premium notice from the insurance company. The best place to look and see if you are underfunding your policy is the annual statement. There will be a paragraph that will tell you how long the insurance will last under the current assumptions.
  • Borrowing against the cash value You want to do everything you can to never borrow against your life insurance policy. I especially think this is true if it's a universal life insurance policy. I feel better about borrowing cash value from a traditional dividend paying whole life insurance policy. But if you do that, make sure that you pay the interest each year. Also, consider paying it back. If it were me, I'd never borrow against a universal life policy. If you plan on using loans in your life insurance strategy, I'd only borrow against whole life policies.
  • Forgetting about riders purchased After many years have gone by, it's easy to forget what life insurance riders you have added to your life insurance policy. I've run across policies with disability income riders or child riders that people had totally forgotten about.
  • Not converting child riders If you have a child with a pre-existing condition, you want to look at any conversion option available with any child rider. It might be the only opportunity to get a life insurance policy for your child.
  • Not removing child riders that have expired Once your kids have a reached a certain age, a child rider may no longer provide any coverage. However, you'll still pay the premium because the insurance company doesn't know your kids are no longer eligible. I've seen people paying for child riders when they didn't need to anymore and helped them get that rider removed.
  • Not keeping your address current You need to contact the life insurance company when you change your address. Otherwise, you won't receive your annual statements - or more importantly - your premium notices. You don't want to take a chance on your life insurance lapsing just because you didn't get a notice in the mail the premium was due.
  • Replacing a life insurance policy You want to think twice about replacing an existing life insurance policy with a new life insurance policy. It's not always in your best interest to get rid of an old policy you have had for years. 
  • Overfunding a universal life insurance policy There are limits to how much "extra" money you can put into a life insurance policy. If you put too much money into the policy, it could create what is called a modified endowment contract that has tax consequences.
  • Transferring ownership of a permanent life insurance policy that has cash value If you transfer the ownership of a permanent life insurance policy that has a cash value to someone else, that could affect the tax treatment of the life insurance. If you are considering such a transfer, ask your tax advisor about transfer-for-value rules.
As you can see, there are still a number of mistakes that you can run into even after you have bought life insurance.

Conclusion


Well, if you are a little surprised of the length of my list, it's probably a good idea to review your life insurance.

Even I still think I left a couple of things out. If you think I missed any mistakes or want to add anything to the discussion, then be sure and put your thoughts in the comments below.

Also, if you need some individual life insurance, and want to help support this site, why not let me be your life insurance agent. Click the blue button just below or click ask for a proposal.