Life Line


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Another View

A lengthy article in a recent online edition of Life Insurance International entitled "United States - Insurers pin hopes on baby boomers" was quite interesting and informative. It's always useful to see ourselves as others see us. By and large, the article covered familiar ground about the huge opportunity the approaching retirement of tens of millions of baby boomers presents. And it discussed the continuing evolution of products to meet the needs of these folks – accumulation, guaranteed lifetime income, long term care, etc. The article is as good an overview of the direction of the industry as I have read and I agree with almost all of it.

However, the article's contention that distribution is rapidly migrating to online Internet delivery is without foundation. I haven't seen data, but as recently as internet sales were less than 10% of the total. To be sure, there are sales organizations like SelectQuote and USAA that do a big job selling insurance over the phone, but the reality is these are still very much sales made by a human being. And, at least in the case of SelectQuote, virtually all its sales are term insurance sales. While an argument can be made – and SelectQuote makes it – that term insurance is better than no insurance when the person dies, that flies in the face of the fact that more people are living longer and need insurance well into late life.

I have no argument with term insurance. I owned a lot, sold a lot and have urged my children to buy it to cover the needs of their young families. But as I approach retirement I realize more than ever how important my substantial permanent insurance portfolio is to my retirement planning. While modern medicine and improved lifestyles have made an early death less likely, it still happens and when it does, too often economic disaster follows without life insurance. Obviously death happens more often as people get into their 60s and 70s and 80s.

But here's the startling fact – the odds are that for every two people who are today 65 years old, one will still be alive at 92 – 27 years later!! Most of us didn't figure we would live that long. And that's today. Imagine what medical advances could mean over that 27 year period.

So what's the point? Just this. Retirement planning is very complex. It has to consider not only advance accumulation of retirement funds, guaranteed lifestyle maintenance income for life, long-term care, but also the consequences of a surviving spouse living a long time. Most people will not have enough money to live the way they want when they retire. They will seek ways to maximize the income from the assets they have accumulated, often at the expense of providing for a lifetime stream of adequate income. In other words, it is very possible that many people in their late 70s and 80s will see their nest egg begin to shrink with increasing speed as they draw down principal to maintain an adequate standard of living. A long life for a surviving spouse may be a nightmare with little or no money rather than a pleasant winding down in the warmth of family, grandchildren etc.

Permanent life insurance bought early enough is a part of the solution to this problem. It has vital characteristics that term insurance does not have. The first is its permanence. It doesn't run out. Second, it is affordable later in life. In fact, it can be made to be paid up – no more premiums due. The cost of term insurance is practically prohibitive in later years. Third, permanent insurance has cash surrender values that provide a terrific source of emergency funds or to supplement other sources of income or to pay for medical expenses, nursing home care, etc. Most importantly, of course, it's there to provide a steam of income to a surviving spouse no matter how long he/she lives.


what is better Term life or whole life and what id the difference?

I have heard that question for over 30 years, so I will take a stab at it. First, you need to figure out "how much" life insurance you need to cover the needs that you are concerned with. That is more important than the "type" of coverage you buy. Then, decide "how long" you plan on keeping the coverage. That is the main factor in determining what type of policy(ies) you should buy. The reason for that is that Term is designed for keeping for a limited time, generally 10-30 years, and then cancelling it. You may not want to cancel it then, but it will cost so much by that time that few people could afford it. You see, Term premiums are based on the period of time that you want the premiums to remain level, and how long you plan on keeping the coverage. Since your risk of death increases with age, normally Term premiums would be very cheap today, and increase yearly as your risk increased. But most Term plans sold today are Level Term with premiums guaranteed to remain level for 10, 20, or 30 years. The company basically "averages the risk" over the period of time you want, and therefore the premium, over a long period of time, so a 20 Year Term plan costs more than a 10 Year, etc. After the initial guarantee period (10-20-30 years), the premium then starts going up every year based on the attained age risk. So, after the guarantee period, most people cancel the policy, not being able to afford the ever-increasing premium. That type is perfect for the person who thinks they will only need life insurance for a limited time (who would know that in advance though), but not for someone who plans on keeping the policy "till the day they die", which could be age 85 or more. For example, if someone (say a male 30 nonsmoker in great health) bought a $100,000 Term policy today with a 20 year guaranteed premium, it might only cost $150 a year for that 20 years. The problem is the premium in year 21 and beyond. At age 70, the premium would be around $7,000 a year, by age 80 about $19,000, and still increasing. Now, if he planned on keeping that policy till the day he died, and he lived to age 80, it would have been cheaper over the long term to have a premium "averaged" over that period of time. But because we don't know when we will die, we have to buy one that guarantees the premium for a much longer period of time. Whole Life generally guarantees everything to age 100 or longer, and costs much more because of that, somewhere around 6x/8x what the 20 year plan above costs, because the company is guaranteeing the premium for 70 years (male 30) instead of just 20. I believe that the vast majority of people need BOTH types of coverage, some Permanent (WL or Universal Life that has a guaranteed premium to 100+), and a larger amount of Term to keep until the kids are grown, mortgage is paid off, etc. Let's say that your need for coverage is $500,000, which is probably what the average wage earner today needs. If you can afford to do so, a good plan might be to have $100,000 to keep "forever", and the other $400,000 as 20 or 30 year Term. That way you have the total coverage you need, and if you don't make changes, you would have a $100,000 coverage at a premium that never went up, and the Term would probably have to be dropped because of the much higher premium. There are many variables that would need to be considered, and everyone's needs are not the same, but the important thing is to get the total amount of coverage you need (even if it is all Term to start). Then work with a professional who will help you review and make adjustments over time, when needed. Remember, Term is for temporary needs, and Permanent is for permanent needs. Those needs will change over time, so don't buy a policy and just forget about it. Hope this helps.