A Not So Important Blog About Nothing

Alright, second in a series on life insurance.  We are going to go a bit more in depth on the different kinds of term insurance.  I wish I could say that there was only one kind, but sadly, there are a great number of different kinds.  On the plus side, the break down into 2 main types.  Annually Renewable Term and Decreasing Term.

Annually Renewable Term

This one is by far the most common.  Every renewal, the price goes up.  You don’t have to prove insurability (traditionally) so long as you are willing to pay the premiums.  The premiums can get quite high, to the tune of $20k/month in the MUCH later years (80+).  No, that is not a typo.  As with all life insurance, it is meant to cover loss of income during your income producing years.  Not to cover you during retirement.

Decreasing Term

This one is common for elderly to slowly reduce the face amount as well as being used as mortgage insurance.  It’s purpose is to slowly drop to 0 over a given set of time, thus why it is used as mortgage insurance.

It should be noted that EVERY kind of life insurance out there, is a variety of one of these two.  These are also the purest form of life insurance, just cover.  Before you leave though, there is more.

Level Term

This is ART from above, but the premiums are averaged over a set amount of time.  The shorter the term, the lower the cost.  You have to be careful with who you buy this from though.  Many companies lower their prices just to attract customers and may be unable to pay claims.  Is it better to have lower premiums, of course, but not at the expense of the company not paying claims.

After the set time is up (typically from 10 to 35 years), the policy reverts back to ART with the premiums practically sky-rocketing afterwards.  In addition, most policies, at renewal, will give you 4 options.

1. Drop Coverage
2. Re-qualify Medically for another Term
3. Leave alone and pay the higher premiums
4. Convert to a form of cash value/permanent insurance (will go over this later).

If you have medical issues, #2 probably isn’t possible, #1 and #3 aren’t desirable, and #4 would probably cut your coverage down so that it barely covers even half of what it did before or your current expenses.  That being said, if you have serious medical issues, having a whole life/permanent policy may be the only way to pass on/reduce final expenses if you don’t have a sizable estate.

Return Of Premium

This is generally a rider added onto a policy.  It does cost more.  How this works is, as you pay your policy, the extra premium goes into a separate account to earn some interest.  At the end of the policy, you will get up to 100% of your premiums paid back.  However, if you cancel the policy at any time, you will NOT get all your premiums back.  It works off of a graduated chart.  Typically, the first 5 years, you will get nothing back. In addition, in some states, even if you go till the end of term, you will only get 95% of your premiums back.

When dealing with these policies, you must run the numbers.  Thus far, 9 times out of 10, ROP is a waste of money.  You can generally do better by taking the difference and putting it into a conservative fund or a tin can in your backyard.

With ROP though, you do have one additional option at the end of term (besides getting some of your money back), and that is taking out a paid-up insurance policy.

Credit Life

This is a rip off.  You are basically paying for term insurance for the balance of your credit card and that is it.  When you die, the credit company gets their money.  That is it.  Your family doesn’t get anything, and the money that could be better served helping your surviving family members, is gone.

Mortgage Life

This is also a rip off and is sometimes financed into your mortgage.  This is pure decreasing term insurance.  The face amount drops with the balance of the note.  Same as credit life, you die, it pays the mortgage company.  It generally costs more than just getting level term by it self.  If you have this, replace it.  Your surviving family will think better of you when they can actually pay the bills with the proceeds instead of giving it to the mortgage company.

Accidental Death & Dismemberment

This one, is more of a rip off than the last 2 combined.  Lets break this up into it’s 2 parts shall we.

Accidental Death – If you death is caused by accident, it pays.  What does this mean? Well, you get into a wreck, you die at the scene.  Death by accident.  Same scenario but the paramedics arrive while you have a pulse.  You die en-route or at the hospital.  Death due to complications as a result of an accident. Doesn’t pay.  But wait? Your died because of an accident and it wont pay? It’s splitting hairs, but basically yes.  It all depends on what is on the death certificate.  One wrong word and it wont pay.

Accidental Dismemberment – This has so many crazy restrictions, it’s actually funny.  It changes based on the policy itself.  In some cases, you have to loose 2 appendages (1 leg and 1 arm; 2 legs; 2 arms; 1 eye and a foot).  And in some, you have to actually have to have it in one piece so they can verify that it is yours and you really did loose it.  IE, you can’t show up with your arm chopped off and not have your arm.

I have even heard of cases where they didn’t pay unless you were fully disabled as a result, although, these are rare.

For both of these policies, just get rid of them.  They are dirt cheap because they pay out even LESS than a pure term policy.

Conclusion

Now, many cash value agents like barging that term only pays out 2% of the time in order to sell a permanent/cash value policy that, so long as you live long enough, pays out regardless.  Although this is true, lets put it into perspective shall we.  That 2% also counts all the policies that have lapsed, been replaced, canceled, etc.  It is not an accurate figure to say the least.  Of all policies that are in force at the time of the policy holders death, I’d say (my guess) 95% pay out regardless of which kind of life insurance it is.  Why not 100%? Well, you have a 2 year contestability clause that gets activated sometimes.

Death my suicide, mis-statement of information on the policy, etc can cause that clause to activate and the insurance company to not pay.  There was a recent article about a women whose house was in foreclosure.  She was given a sub-prime loan and the mortgage company refused to help.  She took out a life insurance policy equal to the balance of the note so her family could pay it off and keep the house.  Within a few weeks of it being issued, she committed suicide so the policy would pay out.  She even left a note to that effect.  Upon reading that, my heart went out to the family.  Not only did they loose a loved one, but they also lost the house because the insurance company wouldn’t pay.  They didn’t report that, but I know it happened.

Keep an eye out for upcoming articles on the other types of life insurance as well as more examples of debt killing and various other products to help you better navigate this crazy world.

Howdy howdy. I know it’s been around a month since my last post and I promised this time would be different. Well, I’ve been busy saving families financial lives so this took a bit of a back seat. Anyways, on to the post!!!

This post will be about the bare bones basics. No frills. In later posts, I’ll get into the differences between specifics and will even include graphics demonstrating various concepts. Don’t laugh at them, I’m a programmer/money coach, not a designer.

When dealing with Life Insurance, there are so many different kinds that it becomes easy to get confused. The insurance companies LOVE it that way. The problem is, many of the agents also get confused. Lets see, we have Credit Life, Mortgage Life, Accidental Death and Dismemberment, Level Term, Whole Life, Variable Life, Universal Life, Variable Universal, Return Of Premium, Permanent, Annually Renewable, Decreasing, etc. Actually, I think that is all of them. If I missed one, put it in the comments.

When you break every single one of these down to the bare bones basics, they are all 1 of 2 kinds of policies. Annually Renewable Term or Decreasing Term. What a minute, we have 12 listed policy types and they are all varieties of 2 of them? Yup. So why are there so many different varieties, well, profits. In general, the more complex the policy, the greater the profits.

Annually Renewable Term

This is probably the most common type.  Usually found in group, level term, and most types of cash value policies.  Every year, the policy renews and the price increases based on a schedule in the policy.

Decreasing Term

The face amount of the policy decreases every year but the premium stays the same.  It is typically used as mortgage insurance and in whole life policies.

It’s important to know these 2 policy types since they are the basis for the rest.  I’ll go over the basics of them now and expand on them in later posts.

Credit Life, Mortgage Life, Accidental Death and Dismemberment

You should avoid these types of life policies.  They are pure profit makers for the insurance companies and don’t benefit your family one iota.  Credit Life is usually bought on a monthly basis by the lender (on your behalf, that you pay for) to cover the current balance.  The beneficiary, the lender. Mortgage Life is typically bought and paid for when you get the mortgage.  Many times, it is rolled INTO the note so you don’t have to pay for it out of pocket.  Several issues with this.

1. It’s typically paid up for 30 years based on expected balance.
2. If rolled into the note, you now pay INTEREST on the premium.
3. If the note is paid off early, unless you make an effort for it, you typically don’t get your unearned premiums back.

AD&D is the worst of all.  Many policies have very strict conditions for their death benefits hence why it is the cheapest of all.  General scenario on how most pay out.  You get in a wreck, die BEFORE the paramedics get their, death by accident, policy pays.  If you are alive when the paramedics get there, you get in the ambulance/care flight and die either en route or at the hospital, it typically wont pay.  Why? Simple, you died due to COMPLICATIONS as a result of an accident, not DUE to the accident.  Splitting hairs right? Now you know why it’s so cheap.

Level Term, Return Of Premium

Both of these are variants of ART (annually renewable term).  Level term is exactly as it sounds, ART with a level period.  You die while policy is in force, it pays.  ROP (return of premium) is a variant of Level Term.  It’s a rider added on that allows you to get your premium back at the end of the term.  Typically the first 5 years, you would get $0 back.  After that, it’s a graduated percentage till the policy term is up.  And even then, you still may not get all of the premiums back.

Now, ROP sounds great doesn’t it? You make it to the end of the term and get all/most of your money back? What they don’t tell you is that you actually LOST money in the process.  How? Inflation.  The reality is in year 6 you start seeing a balance.  That balance grows interest.  But the interest and 5 year loss equals out to an actual interest of 0% and an effective interest of -4%!  Yea, that’s a great deal.

Permanent

This is a tricky one.  This can be virtually any kind of policy.  It can be a term policy that expires at age 95, it can also be a cash value type policy . This is now a more universal term than anything.  Basically, any policy that expires/matures between ages 80 and 120 can be technically be classified as one.

Whole Life

This is decreasing term with a savings account.  The policies are designed so that when they mature, the cash value that is built up equals the face amount.

Variable Life

This is an interesting policy.  It has a minimal death benefit, if you pay for it.  With this kind of policy, your face amount changes with the underlying investments.  Assuming you decide to use investments.  When the market is good, your face amount is usually great.  When the market is down (like as of this writing), your face amount is down.  You pay the same premium either way, and may get a rate hike if the cash value drops to $0.

Universal Life/Variable Universal Life

A universal life policy is an evolution of whole life.  Instead of being DT (decreasing term), it’s ART.  You get a minimal death benefit with a cash account that is invested in the market.  You have the flexibility to decide the premiums and the coverage while the policy is in place.  A variable version adds the ability to determine a wider variety of investments for the cash account.  On both of these, you typically have 2 options.  Option A and option B.  Option A, your beneficiaries get the face amount ONLY.  Option B, you pay MORE so your survivors can have both the face amount and the cash.

This is just a rough overview.  I’ll spend more time on each one individually here in the coming days/weeks/months/years.

I know everone is just DYING to know about this (it’s nice to dream right?), but I’ve been keeping tabs on my weight since starting at 24 Hour Fitness.  Almost daily actually.  Since Mar 16th I have lost 13 lbs.  And it shows.  I look slimer, I feel better, have more energy, and my love handles don’t bounce as much when I run (more of a jog really).

Wife and I also started on a 90 day sprint.  Might post up weekely updates on that as well.

Also began work on Arlington’s 4th of July website.  It needs MASSIVE work.  The current incarnation is NOT of my creation, but it slowly turning into one.  The Google Maps screenshots have been turned into real GMaps, the search on the main page has turned into Google Custom Search, and Google Analytics has also been added to all pages.  BTW, Google, you can send those endorsement checks to my creditors, they are hurting so bad without my payments that they could really use the help.  Why else would they be raising rates right? They wouldn’t do such a decietfull thing as raise rates just because they can right?

I’ve also been having a good talk with Larry Wiedel this week.  Made me realize that I really need to not work so hard.  What’s the point of working 30 hour days for your family, if you never spend time with them?  For that sir, I thank you.

Anyways, I better get back to catching up so I can spend quality time with my daughter and wife today.  And I’m glad I did make time this week just to spend with them.

See you in the next post!