Life Insurance – Why and How

This article is an original article from January 5, 2009.  It was written by Nick Perry.

For some reason, people are often reluctant to talk about life insurance. Maybe they think that discussing it means admitting their own mortality. Maybe they think that talking about it makes the possibility of death into a certainty. Or maybe it’s because they’re afraid to admit that the money they’ve made from working hard their whole life won’t be enough to cover their final costs. Whatever the reason, life insurance isn’t often thought of as a fun topic of conversation. And because of that, people push it to the back of their minds, try not to think about it, and hope that their savings account and three bedroom two bathroom house in the city will provide all the assets their loved ones need after they’re gone.

In the early 2000’s, my mother and father lived in a four bedroom two bathroom house on the Satilla River in Woodbine, Georgia and the real estate market was good. My parents were out eating dinner one night and happened to mention, just in passing during a conversation they were having between themselves, how fair their house was from the river. Their house wasn’t on the market, but they got two offers to purchase it on the spot – without marketing it or even listing it! Even though at the time my father was in his late sixties and my mother had just crossed fifty years old, they didn’t worry about final expenses or their debt. If things got too bad, no trouble. The real estate market was good, so if worse came to worst they could just sell the house and cover their expenses by downgrading to a smaller home. In 2005, the real estate market began slipping.

By mid-2006, the real estate market in southeast Georgia had crashed.

Around Thanksgiving 2006, my father started feeling ill.

By Christmas 2006, he started stumbling over words and forgetting things he normally wouldn’t. He didn’t want to worry about it, so he didn’t talk about it. He just pretended nothing was wrong. I guess it wasn’t a fun topic of conversation.

On May 9th, 2007, my father was diagnosed with cancer of the brain, bone, lungs, blood, and colon. That day was my parents’ 32nd wedding anniversary, and I still have the journal that my dad wrote in that afternoon.

On July 29th, 2007, at 12:40 in the morning, my father died. It would take a little while, but before too long we realized that we were in trouble. There was more debt than we had realized, and there were medical bills coming in that his health insurance was doing nothing to cover (which leads me to plead with you again – even if you don’t use me, please use a local independent agent for your health insurance needs, someone you can build trust with and someone who has your best interests at heart). We did everything we could, but things quickly got out of control. My father didn’t have life insurance, and his estate was unmanageable.

This story doesn’t have as sad an ending as it could. That house on the river sold about a month before we would have run out of money and provided my mother with enough capital to stabilize herself and move back to Alabama, where she grew up. But it was a very, very close call, and there’s a lesson to be learned from it. If you expect your savings account to cover your final expenses, then you need to realize that that’s going to mean that those savings are going to be wiped out. If you expect your loved ones to carry the burden, then you have to be prepared for the responsibility of placing that heavy, heavy load upon their shoulders – and you have to realize, like it or not, that no matter how hard they try to feel otherwise they almost certainly won’t be able to help a few feelings of resentment. And if you’re hoping that your non-liquid assets like your real estate, your classic car, or your antique coin collection will provide a source of cash, then you have to consider that those things all take time to sell, that those you leave behind will be likely be too preoccupied to negotiate a fair price, and that it’s truly difficult for your loved ones to sell off all of your possessions when they’re desperately trying to cling to everything that reminds them of you.

Furthermore, while the assets you leave behind may be enough to pay for the cost of your burial, your car payment, and your mortgage, will it be enough to replace the income that your loved ones suddenly find themselves without? And finally, to the folks in their twenties and thirties, don’t think life insurance is only for people in their sixties and seventies. For just a few bucks a month, you could have coverage right now that protects your loved ones in the event of your death, meaning that you can worry about building your career and your life without running the risk of having it all fall apart should a tragedy befall you. Be honest – if you’re twenty-five and newlywed, do you have enough set aside to cover your financial responsibilities and provide for your spouse if something were to happen to you? The answer is probably “no,” and that’s okay. You’re just starting out in life! But that means it’s all the more important for you to protect the integrity of what you’ve accomplished, and the best way to do that is with life insurance.

So, once you’ve realized that you do need life insurance, what next? Well, there are a few major different types of life insurance: term life, whole life, and universal life.

Term life insurance is the simplest, most straightforward type of life insurance. Term life is also the least expensive type of life insurance. Basically, you buy a policy that is in force for a set period of time – a set “term.”If the insured person were to die during that period of time, the policy would pay the entire face value. So, for example, if you purchased a ten year term policy to insure your life and you passed away three years later, the policy would pay the full death benefit to the beneficiary.

When most people think of life insurance, they think of whole life. Whole life provides permanent protection while building a cash value. Premiums are generally fixed along the life of the policy. The cash value of the policy means that, should you need to at any point, you can withdraw money from your policy or even take loans against it, providing you with a small source of emergency funds. All of this is, of course, in addition to the normal death benefit of the policy.

Universal life is the most flexible form of life insurance. Over the life of the policy, you can adjust the premium amounts and payment schedule to better suit your needs at any given time. Universal life policies also accrue a cash value, just like whole life. That cash value allows you to earn a small rate of return based on market rates as well, so you can think of whole and universal life insurance as a low-risk source of very small returns.

So which one is best? Well, that depends on your needs, and a true needs analysis is beyond the scope of this article. The very, very broad brush answer, however is this: if you need life insurance to cover the risk associated with limited time propositions (for example, you want to make sure that if you pass away your kids have enough money to finish college) then term life is probably for you. If, on the other hand, you’re looking for permanent protection that will last for the rest of your life and provide an inheritance for your loved ones, then you need to look at whole or universal life.

For a more in-depth analysis of your personal needs, please feel free to contact me for a personalized needs analysis. And, of course, if you have any questions about this article, life insurance in general, or anything else covered on this website please don’t hesitate to ask me!