January 7, 2015
It’s A Girl! And I Need More Life Insurance…
My wife Amanda and I welcomed a baby girl (Norah Marie Wells) into the world on December 17th. As a planner by both nature and profession, I wanted to make sure we had all of our ducks in a row prior to her arrival. One of my top concerns was purchasing additional life insurance and I wanted to share my experience.
Type of Life Insurance
Insurance by nature covers low probability, high cost events. A premature death is a perfect example of the need for insurance. Choosing the type of life insurance I needed was the easiest part of the process. For 99% of people out there, term life insurance is the most cost effective and correct insurance to purchase. At Rockbridge, we believe that it is best to keep insurance and investing separate. Blending insurance and investing creates complicated products that are mainly benefiting the insurance company and the person selling the product (examples include whole life insurance and universal life insurance)
Amount of Insurance Purchased
In order to determine the amount of life insurance coverage I needed, I looked at what expenses I wanted to cover. This is a very personal decision and many people will come up with different results. After some thought, I wanted to go with a higher amount of insurance that would cover almost everything I could imagine. The main items were college expenses for potentially 2-3 kids and income for my wife while the children are still at home (and possibly forever). For me, a policy of $2.5M was conservative, but appropriate.
Most term life insurance policies are level term, meaning that the payment and insurance benefit stays constant for the duration of the contract. The time value of money needs to be factored in when determining the amount of coverage you would like to purchase. At a 3% inflation rate, $2.5M will be worth less than $1.4M in 20 years.
Duration of Coverage
For term life insurance policies, there is a set duration for when the policy is effective. The most common durations are 10-, 20-, and 30-year terms. This was another area where I struggled a bit on my decision-making process. I wanted to time the ending of the contract with the need for life insurance. In this case, a majority of the need was based on living expenses and college costs for the next 20-25 years. Looking at the pricing, a 30-year policy was significantly more costly than the 20 year policy. In the end, I purchased a policy with a duration of 20 years to cover a majority of the risk.
Cost is one of the most important factors. Insurance is only good if you keep paying the premiums! I wanted to keep my annual insurance costs as low as possible, but still meet all of my needs. The $2.5M 20-year policy was the personal sweet spot for me at $969/year.
A large factor that comes into play when purchasing insurance is the physical and health screenings. Life insurance companies have different risk categories that an insured individual falls into. The better health you are in when you purchase insurance, the lower the likelihood of premature death, and thus the lower the cost of insurance. I am still waiting to hear back on the final qualifications, but I expect toend up in the highest category.
One final cost item to note is how the insurance salesperson is compensated. Although you don’t explicitly pay their compensation, on an average term life policy, the agent will make between 30-90% of the first year’s premium. They also may make up to 5% of the premium for every year you renew the policy. This is not something to be frowned upon, as agents need to be compensate; however, it needs to be noted that it is in their best interest to sell a more expensive policy.
I was not too particular with the insurance company that I purchased the policy from, as long as it has at least has a strong credit rating and is expected to be around for the long term. The least expensive $2.5M 20-year term policy quote for me was Metropolitan Life Insurance Company (MetLife).
At Rockbridge we provide unbiased financial advice and don’t personally sell any products. Therefore, even for a personal insurance policy, I had to use an outside resource. I was quite curious with the whole insurance buying process, so I went with an insurance agent that sold the policy I was looking for, but that I had never met. I would assume that my experience is typical for someone looking for a new policy.
– Initial Meeting (60 minutes)
I set up an initial meeting to purchase the policy. I ended up going to their company’s office because it was a short walk from mine. I had already priced out the policy I was interested in at www.term4sale.com, but I left those numbers in my pocket. I explained exactly what I was looking for prior to the meeting and the agent already had some price quotes for policies on his computer. The downside is, he solely priced the policy with his own insurance company and did not look at the costs of others in the marketplace. Many agents have the ability to sell both their own products as well as products of other companies. I then mentioned the other insurance policy and the price being significantly lower ($1300+ vs. $969). After dodging a few planted questions as to why their proprietary product was better, he was able to look and find the exact same MetLife policy I wanted in their system.
I will note that there was also a brief conversation about Whole Life Insurance which is quite costly and not really appropriate for my situation.
– Second Meeting (15 minutes)
This meeting was the finalization of the paperwork and payment of the first annual premium. As soon as I wrote the check to the insurance company, I was covered for the life insurance policy while the process is going through underwriting. The company may determine that I am in a different risk category and may have to pay more every year or lower your coverage amount, but initially, I am covered from the moment you write the check.
– Health Physical / Screening (30 minutes)
The life insurance company wants to make sure that I was insurable and a good candidate for them. As part of the underwriting, I had to complete a physical with blood draws, a urine sample, height/weight and blood pressure checks as well as a detailed health background screening. I also had to sign a health care release form so that the insurance company can appropriately look at my health history from previous doctors. This is all pretty standard and the nurse was great.
– Additional Information (15 minutes)
This may not happen to everyone, but the insurance company needed additional information for my policy. In the past, I had a pilot’s license and participated in the general aviation community. This and other activities are considered a higher risk for the insurance company. I had to provide more information to the insurance company that I had indeed stopped flying years ago and do not have any plans to fly in the coming years.
I am currently still awaiting approval for the final health category, but I don’t expect any complications.
– Purchase life insurance ONLY if you have a need.
– Term life insurance is almost always the best solution.
– Determine an approximate cost of insurance prior to meeting (www.term4sale.com).
– Being healthy saves you a lot of money in insurance costs.
– Be patient, the process takes a while.
I wanted to share my experience and thought process to help others feel a little more at ease about purchasing life insurance. As always, helping determine the value and term of a life insurance policy is just another way that Rockbridge can help in your financial lives. And since we don’t sell insurance, you know we will always give you our honest opinion!