My Experience with Life Insurance – the Good, the Bad and the Ugly

Photo Credit: feministjulie via Compfight cc

Photo Credit: feministjulie via Compfight cc

Figuring out and obtaining enough life insurance is a task that is easy to put off, forget about or wrongly assume that you have enough of.

Again this is something that Erin had to learn the hard way. Please be kind to her as she generously shares her story in hopes that a few of you will take the time to play out what would happen to your family if you or a significant other were to pass away prematurely. Don’t forget to do something about it if you realize there’s a shortfall!

Steve and I knew that we didn’t have enough. We took action and worked with a financial advisor to understand what we would likely need and were given quotes for different types of coverage. We completed our applications and only had our blood tests and physicals left to do.

Then, life got in the way. The applications proceeded to the bottom of the pile on our desk, which is equivalent to a black hole. We never got it done. Then Steve died.

Knowing that we did not have the coverage that we needed added A LOT of financial stress to an already extremely emotional and overwhelming time. When you add the surprise beneficiary issues I ran into, it made the worst time in my life even tougher.

Life insurance was one of many things I relied on Steve to handle. I trusted him implicitly, so when he said what we needed I agreed. After he died, I needed to learn a lot of things. One of my priorities was to learn more about life insurance.

Combing through my life insurance policies and adding additional coverage was a very high priority for me. I had to make sure that my girls would be financially okay if anything ever happened to me.  Here is what I learned (the hard way) about the different types of life insurance that are out there.

I am NOT a financial advisor, so before you decide what you need please pursue professional advice.

Term Life Insurance

Term life policies provide life insurance protection for a specific period of time. If you live past the end of the term, the policy simply terminates unless it is renewed. Renewal at that point tends to be extremely expensive.

With guaranteed level term insurance both the premium and the amount of coverage (death benefit) remain level for a set period of time, i.e. 10, 15 or 20 years are all very common. Many policies are also convertible to permanent coverage for a portion or all of the term.

You can also secure group term insurance through your employer benefits (provided you have them). Typically these are not portable, so if you leave your job (or your job leaves you), you no longer have coverage. Usually it makes the most sense to have some sort of individual life insurance.

Permanent Life Insurance

Permanent insurance policies provide protection for your entire life as long as you pay the premium to keep the policy in force. With a permanent policy, a portion of each payment goes to the cost of insurance and a portion goes into a savings or investment account that can build over time.

This cash value grows tax-deferred as long as the policy is in force (and you follow the rules). If you cancel the policy before you die, you will receive the cash value in the account (minus any surrender charges), but may be subject to taxation (depending on your cost basis).

There are other definitions that are used to represent different types of permanent life insurance.

  • Whole life enables a person to make equal payments for their life or as long as they want the policy in effect. The death benefit and cash value are predetermined and guaranteed. Gerber life is a good example of this.
  • Universal life allows policyholders to pay premiums at any time, in any amount (within set limits), as long as the policy expenses and the insurance costs are met. The amount of insurance coverage can be changed and the cash value will grow at a predetermined interest rate. The interest rate may vary over the length of the policy, but there is usually a guaranteed minimum.
  • Variable life also enables a person to pay a level premium for their life. The difference between this type of policy and the whole life policy is that the death benefit and cash value will fluctuate depending o the performance of investments. This policy has sub-accounts which are similar to mutual funds. Another way to think of this money is a pool of investor funds professionally managed. The policy owner has the ability to select the sub-accounts in which their money is invested (from the available list) to coincide with their individual risk tolerance.
  • Variable universal life is a combination of universal and variable life insurance. A person can pay premiums at any time and amount (within limits) as long as the costs are covered. The amount of the insurance coverage can be changed and the cash value goes up or down based on investment performance in the sub-accounts.

My Experience Filing Claims

Some insurance companies give policy holders the option for “extras” such as accident, cancer, or long term disability coverage. Generally speaking (and depending on the cost) they may be worth it. I say “may” because of the experience I had. Steve had three different policies through three different companies.

One company (Aflac) refused to pay out the policy because of their long list of exclusions. The second company (MetLife) paid out the entire amount only to request half of it back – apparently due to a policy change that no one could find documented. PLEASE hang on to your actual insurance policy and any policy changes, especially those with your signature on it.

I fought this one and asked them to produce the copy that showed the new exclusions (I apparently had the “old” policy which did not list the contested exclusion) and they never produced it. They eventually turned it into collections and threatened court all without ever producing the proof – how awful is that?

The cost of fighting it coupled with the fact that I was fighting to survive each day forced me to return half the money without having the simple courtesy of seeing Steve’s signature accepting a change.

The third company (Dakota Capital Life) is a private life insurance fund and they paid the whole amount. I was beyond grateful to this organization for not trying to get out of what they owed.

Do Your Homework

Read the exclusions in each policy and determine if the exclusions are so far reaching and vague that they will exclude any “likely” cause of death for you. Compare the exclusions to your normal activities. Some companies are great – while others seem to be there to collect money, but never pay.

There are a ton of options out there – don’t let the extensive list keep you from taking action. Life insurance is an investment, whether you buy a term or a permanent contract. We all hope it is something that ultimately isn’t needed due to a premature death.

Remember, the policy isn’t for you – it is for those that you leave behind. The small cost is absolutely worth it.

What I Did

Again – I am not a financial advisor!  I opted for a 30 year term life insurance policy. My reasoning was this – in 30 years I will not have a mortgage. My children will be out of college and I will have enough cash saved in my retirement accounts to cover all of my final expenses and any debts I may have at that time.

The primary goal of my life insurance is to ensure my children are taken care of if God forbid something happened to me. As adults, I fully expect them to be capable of paying all of their own bills. The 30 year term policy was really affordable, it can be cancelled when/if it is no longer needed and my rate is locked in until I am 59, which is great!

The policy is not tied to an employer – it is my own personal policy. Having this coverage means I do not need to rely on an employer to provide it and it can’t change as benefit packages change.

I also have a second life insurance policy through my employer. This policy allows me to have 8X my annual salary, up to a specified amount. I chose the max, so as my annual salary increases (hopefully!), so does my coverage until I hit the limit.

This policy also allowed me to have up to $10,000 of coverage on each of my children. I chose to include that coverage since I know too well that unexpected nightmares do happen.

The total cost of Steve’s funeral, cremation and headstone well surpassed $10,000. Death is expensive – please make sure you have some coverage for those left behind. I hope that by me sharing my journey full of challenges, that you’ll do things differently while you still have time.

When’s the last time you looked at your coverage? Do you know where your policies physically are?

Do You Have Enough Life Insurance?

Photo Credit: One Way Stock via Compfight cc

Photo Credit: One Way Stock via Compfight cc

Life insurance – not typically anyone’s favorite topic of conversation.

Even though it’s not fun to think/talk about, it’s oh so necessary – when you don’t have enough of it, you REALLY feel it.

Erin and Steve actually had two new term policies sitting on their desk at home. All they needed to do was finish the underwriting process – but they didn’t. Hopefully Erin’s Story will motivate you to take action – TODAY!

Life insurance is a complex topic. Everyone has an opinion on it – and they are often vastly different from one another. Rather than focus on which types of life insurance are best/most appropriate, let’s focus instead on getting the right amount in place – for your family.

 How Much Is Enough?

Wouldn’t it be easy if you knew the answer to that question with 100% certainty? It seems to be an ever-changing number for most. It’s a number that’s also completely unique to your situation – dependent on your lifestyle, income, number/age of children, level of debt, etc.

It doesn’t help that there are so many theories on how to calculate the right answer either. You could take a human life value approach, debt pay-off, or straight up income replacement. Or some combination of those three.

This CNN Money article talks about someone that makes $50,000 per year should have anywhere from $250-500k in coverage. The New York Times on the other hand claims that the life insurance industry’s rule of thumb is 10x your annual salary. Which is right? Both are generalizations – not specific to your situation. Take some time to think about your individual family’s needs and ask yourself the following questions to get closer to the answer.

Good Questions to Ask

  • Do you have a survivor need? Is anyone depending on you that if you died today would be negatively impacted? Are you depending on anyone else?
  • How much debt to you have? Make a list of your liabilities – mortgage and consumer debt and tally it up. Would your family continue to live in your current home if you passed away today?
  • What are your family’s expenses? How would they change if something happened to you or your spouse? Would you need to hire help for the home or additional childcare?
  • How much are you currently saving? What are your savings goals? Are you wanting to help your children with college tuition costs? Are you on track to fund your retirement goal?
  • Are you making any rate of return or inflation assumptions? Are they realistic?

Figuring It out for Yourself

I think it’s important that you play out the scenario in your head to see how your family would be impacted without you here. If you contribute to the household financially, how much would it cost to sufficiently replace you? Would the goals of your remaining family members still be carried out?

If you’re the primary caregiver, how would your family replace you? Would they have to hire outside help? How much would that cost? Besides caring for the children, are there things that you’re responsible for that would still need to get done (home maintenance, etc)?

What about a grieving period? Would you want to make sure that you could provide for your spouse to not work for a period of time if you could?

More Art Than Science

As you can see calculating your life insurance needs is more of an art than a science in most cases. Personally, I’d rather err on the side of having a little too much than not enough. It may make sense to calculate straight income replacement (like the 10x your annual salary assumption above) AND try to calculate your needs by answering some of the above questions.

Compare the two – are they very far apart? If you’re still unsure (or not wanting to do the math yourself), consult a professional – either a financial planner that can evaluate your entire situation or an insurance professional that can help you to look at your individual life insurance needs.

Take Action

Take a few minutes today to tally up what coverage (if any) you currently have in place. Ask yourself some of the above questions to get an idea if it is in the ballpark of being enough.

Seek help if you’re still unsure. Figure out how much life insurance you need and then make sure to start/complete the application process – TODAY!

Have you been putting off reviewing your life insurance coverage?

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