Life Insurance -- Who Needs It?

By Nancy Zambell, Contributing Editor

Here it is, well into summer and I've finally tackled the cleaning out of my 2007 files. What a job! As always, I'm absolutely amazed at the amount of money I've managed to fritter away!

But as I was weeding out my reams of surplus paper, I was reminded of a life insurance policy I took out almost 20 years ago. At the time, I was employed by a large bank and had a minimum employer-provided policy. But I knew that I wanted to branch out on my own in the near future, and since I had just become the primary supporter for my widowed mother, and I felt I needed a little something extra in case I left this world before she did.

The policy is a Variable Life Appreciation policy, which has long since gone past the point of surrender fees. One of the features I liked when I purchased it was the availability to choose among a variety of funds in which my money was invested. Fortunately, those funds have done very well over the years, and I have a sizeable cash value. But I don’t have any children, and therefore, the main reason for life insurance -- to help the family continue on the same path of prosperity -- doesn’t exist for me.

Consequently, I have been going through the numbers, trying to decide if my money would be better invested elsewhere. And that prompted the thought that many people buy these insurance policies at an early age, and like me, tend to mostly forget about them, often neglecting to consider them when taking their annual assessment of their financial and investment positions.

But if that’s the case, you may be forgoing the opportunity to determine if, indeed, your money could be invested in a more profitable manner. If you bought a policy when your children were young, and they now have families of their own and don’t necessarily need your insurance policy for survival, then maybe you don’t need to be paying the premiums.

If your spouse has predeceased you, you may want to reduce the face value of your policy -- just enough to cover your burial expenses. Or you may want to cancel it, if you don’t need the money for that purpose, and you can free up those dollars for better-returning investments.
And then there are certain types of life insurance that most folks just don’t need. Credit life insurance, which pays off installment and mortgage loans if you die prematurely, is often just not worth the money, as the premiums are very expensive. Unless you are in ill health, and think you are going to pass away before the loan expires, you may want to consider it, since these policies don’t usually require health examinations.

Insuring your child is also another waste of money, unless he is a child prodigy or a famous actor whose income you rely on.

Senior insurance, often advertised on TV and by mail, claims that “You can not be refused.” However, the fine print usually says that no death benefit will be paid if you die within two years. Also, the face amounts of this insurance are pretty minimal and the price charged per dollar amount of coverage is usually much higher than a regular life insurance policy. Consequently, if you are healthy, you have better alternatives.

There are four basic types of life insurance (with scores of variations among them), but the primary types are:

Term policies pay a death benefit if you die during the term of policy. While generally less expensive than the other types, the biggest disadvantage is that as you age, your premiums increase, becoming very expensive and often unaffordable over the age of 65. And if you outlive the policy, your heirs receive no death benefit.

The premiums of Cash Value, or Whole Life/Permanent are two to three times those of term insurance, but include guaranteed renewable insurance coverage for your lifetime, as well as an investment component that aims to build tax-deferred cash value. Some policies allow you to choose your investments, others don’t. And if the investments don’t fare too well, you may adversely affect the cash value and cause your premiums to escalate.

Variable Life, also called Variable Appreciable Life Insurance (the policy I have), allows you to invest a portion of your premium dollars in equities, bonds, and/or money markets. Then, depending on the performance of your investments, the value of your death benefit and cash value will increase or decrease.

Variable Universal Life combines Variable Life and Universal Life, and has more options in terms of investment accounts, and provides flexibility in your premium and death benefits. A minimum death benefit is guaranteed. This policy allows you more control over the cash value, offering the opportunity to build up significant resources, but is also more expensive than the previous policies.

Now that you are aware of what is available in the life insurance industry, it’s time to assess your own needs. One factor you may want to consider is that as a whole, folks are living a lot longer today, and blowing through the bulk of their retirement savings. Therefore, a life insurance policy for the sake of leaving a little something for your heirs may be desirable -- if the cost is right.

To help you decide the amount of coverage, there are several websites that offer life insurance calculators. One caveat: there are plenty of other calculators available, but many of the sites are run by the insurance industry, so be aware that they are trying to sell you insurance!

http://moneycentral.msn.com/investor/calcs/n_life/main.asp

http://www.smartmoney.com/insurance/life/index.cfm?story=intro

Now, let’s talk about the state of the industry.

One concern I have with the policies that allow you to choose among the insurance company’s investments, is that they are the insurance company’s chosen range of investments. And recently, we have seen just how badly some of their investments have fared. American International Group recently had the worst quarter in its 89-year history, losing $7.81 billion, primarily from investments in complex financial instruments that went downhill. They are not the only insurance company to take a hit. Both MetLife and Prudential Financial reported decreased profits in the fourth quarter, due to investment losses.

Another question in my mind is that as the baby boom generation ages, insurance companies are going to be faced with a lot of payments, clustered together. That will, no doubt, lead to higher premiums for folks buying new policies.

Consequently, if I were buying life insurance today, I would not only ask myself this series of questions that I mentioned in my comprehensive Financially Fit article on life insurance last August:
 

• Do I need a policy that pays family income benefits, versus a lump sum?
   

• Do I desire an increasing policy (where your coverage and premiums rise) or a decreasing policy (decreasing coverage and premiums)?
   

• Do I want a renewable policy?
   

• Check for exclusions, including alcohol and drug abuse, risky sports, preexisting conditions.
   

• How flexible is the policy and is there a grace period before coverage is ended?
   

• Does the policy contain a waiver of premium, should I be unable to work?
   

• Can I set up the policy under a trust agreement?

The point is this I am not a believer or disbeliever in life insurance. Your personal situation should answer that question for you. But, I do encourage you to treat it like any other investment: thoroughly analyze it, keep up on new developments, research the cost and potential returns, and then make the decision whether it is right for you.

But before you do that, let me bring you up-to-date on what is currently available on the market.

But I would also want to know about the financial health and profit track record of the insurance company, the demographics of their policyholders, the track record of their favored investments and their history of premium increases.

Bottom line, I am of the camp that life insurance is really not an investment. It is insurance first, and maybe additionally, has some investment features. Therefore, decide if you need the insurance, and then consider if the extra cost for the policy’s investment features is worth it in terms of long-term return, net of the costs.

This concludes this week's issue of Financially Fit.  We encourage you to visit our website to review past issues of Financially Fit:

http://www.brokeradviser.com/newsletter.cfm

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