Life Insurance Planning

Generally speaking, if you are providing for your family, you want them to be financially secure if you were to pass away. Another major reason to buy life insurance is to replace money that otherwise would be lost in estate taxes. Ultimately, life insurance is a way to say “I love you” from the grave.

A person earning $50,000 per year who needs to protect this earning capacity might purchase a policy with a death benefit of $833,333. To determine this death benefit, “capitalize” the income stream by dividing by an expected long-term after-tax rate of return, in this case 6%.

$50,000 divided by 6% is $833,333

If your inheritor invests at a rate of 6% or better, they will be able to replace your lost income and the money will last, or even grow, over the duration of their life.

Life insurance costs pennies on the dollar of death benefit. The costs are called premium, and the benefit your beneficiaries receive is called the death benefit. The least expensive type of life insurance is called term insurance. The factors that determine the cost of the insurance are the term, the age and health of the insured person.

A term policy lasts a certain number of years, usually 10, 20 or 30 years. As long as the premiums are paid during this term, the insurance company has an obligation to pay the death benefit to the beneficiaries, if the insured person dies. The longer the term, the higher the premium costs.

Age is a major factor determining the cost of insurance. The older you are, the higher your mortality, and the higher the premium. The final factor is health. Insurance is rated from super premium, for the most healthy, to standard, for the average person. For a person who has health concerns, the standard rates increase in increments, called tables. These tables receive a letter of the alphabet; table C costs more than Table B, for example.

Life insurance companies are conservatively managed and state regulated. They are required to keep their assets liquid and available to pay claims, as made. Companies are rated by independent agencies, and receive ratings that compare their financial stability with other companies. Most insurance brokers rank their companies by rating, and this information is readily available to everyone.

One important factor to consider with insurance companies that may not be readily apparent is the quality of the insurance agent. If you have an agent who may not be in business when a claim is made, or when you have questions many years down the road, you may face delays, complications and frustrations with service. It is a prudent decision to choose an agent, and insurance agency, that has both a long history and a long future. We recommend working with a firm like A&I Wealth Management, with multiple generations of agents.

Finally, the agent’s and their agency’s relationship with the insurance company is a factor. Oftentimes we have found that for a person with complicated health issues, the insurance company that looks like the least expensive is often not the best when going through underwriting. But for an agency with a strong relationship with one or two insurance companies, getting the person underwritten at a preferred rate is beneficial to the client, saving them money, stress and time.

You can expect a four-step process to acquire life insurance. This process is called underwriting, and it varies a little between insurance companies, type and size of the insurance policy, and your health history.

The first step is to complete an online or paper application with an insurance agent. Importantly, you will sign a document that gives the insurance underwriter permission to see your medical records. It is important to be honest on the application. Death benefits will not be paid if the insurance company can prove you misled them.

Next, the company will set up an appointment in which you will be asked a series of health questions that mimics the questions already asked on the insurance application. At that point, you may be asked to submit a urine sample, blood sample, or both. The actual requirements may vary. As a general rule, the larger the death benefit, the more strict the underwriting process.

Third, the underwriting department of the insurance company reviews your health history. They gather your medical records and decide to make you an offer. At this point, the company could decide to decline to issue the policy as well. If you have a complicated health history, it is important to work with an experienced agent to help avoid a decline.

Fourth, you pay the premium and receive the insurance policy. Your agent will keep a record of the policy for you and your beneficiaries. At A&I, we help make sure your beneficiaries are kept up to date with our annual meeting process. We also provide a way to simplify your estate and reduce the burden on your survivors with our Family Financial Album and Elder Plans.

As long as the premiums are paid, the policy remains in force. For a term policy, you likely have the option to convert it to a permanent insurance policy. For a permanent policy, you may be able to build up enough cash value in the policy so that you do not have to pay premiums for your entire life.

At A&I, we provide insurance planning so that you know you are getting the right amount of insurance for your unique goals, values and relationships.