Life insurance can be expensive but it is an absolute necessity. There are a number of options available to manage that cost. One of these is low cost term life insurance. Other options may include finding the best deal by arranging for a variety of life insurance quotes and negotiating a lower commission from your broker.
John and Myra were in their early thirties with a three year old son and a one year old daughter. They had bought a new house and are building their lives. John's career is beginning to take-off and Myra is a stay at home mum. She has some part-time work that provides a little extra. She plans to resume her career when the children are a little bigger.
One evening Myra hears the door bell ringing. It rings again. It is the police. Myra hears the bad news. John has been killed by a hit and run driver in heavy rain on his way back from work. She is devastated. The family rally round.
After the funeral it slowly dawns on Myra that she has no resources with which to carry on. Even the funeral costs will be a drain on her limited resources. The mortgage repayments alone will take up more than her salary. She has been dealt a double blow. The life insurance that was deemed too expensive just a few months ago would have kept the family on their feet. Now what?
Over the next few years Myra may be able to overcome the financial blow. In the short term funds are required.
Life insurance is similar to pouring money into an empty hole until something happens to justify the cost.
Life insurance should be only a part of a balanced financial portfolio. The portfolio should include investments and savings. If you cannot afford the cover recommended by the broker then take less. As the investments grow, the need for life insurance diminishes.
One solution which minimizes the amount spent on life cover is a life policy that includes an investment portion. A variable universal life policy is a good example. As the investment grows, the amount of life cover reduces. The policy allows flexibility - additional funds may be invested to boost the investment, or the premium reduced to cover only the risk when times are tough. After a few years the policy provides a useful cash value.
The main objection to this type of policy are the expenses associated with it. This includes hefty commission. What it does ensure though is that the funds cannot easily be drawn in the early stages - a problem with most investments.
An alternative is to take term insurance. This should be coupled with a separate investment and the discipline to maintain the investment.
Life cover is expensive. One of the reasons for this are the high commissions paid to the sales-people. But life insurance is necessary. Shop around and find an affordable option. Even if you cannot afford the cover you need, remember that some cover is better than none.
Showing posts with label Guide to Life Insurance. Show all posts
Showing posts with label Guide to Life Insurance. Show all posts
Wednesday, 09 January 2008
Thursday, 20 December 2007
How Life Insurance Works
Sean Jameson is the marketing manager of a large toy manufacturer. He is a family man of 40. His wife Cindy is a part-time assistant at a local supermarket. Their children Cheryl (14), Adrienne (12) and Bart (6) are enrolled at a private school.
The Jamesons own two cars, a modern home and have some savings. The house is mortgaged to the bank and the cars have been financed through the bank's Motor Finance division.
Sean was already running late for the regular Monday morning management meeting when he received a call from the bank's broker. He hastily agreed to a meeting with the broker.
The meeting took place at the Jameson's home in the early evening. Sean and Cindy were brought face to face with the bare facts. If anything happened to Sean, the family would be all but destitute. Their savings would last a year at most and Cindy would probably lose the house and cars. The private school would have to go.
This huge risk could be covered by a life insurance policy. The needs analysis' revealed that a capital sum of at least $1 million will be required as an investment to ensure that the family could maintain their lifestyle in the event of his death. The broker's plan will provide the required capital. A part investment, part life cover mix. In just 25 years the premium of $1000 per month will have turned into an illustrated $1 million and the family will be protected. The premium will increase by 5% each year. In addition, the policy would include disability cover at no charge! The broker completes the form, Sean signs and undergoes the required medical tests.
The policy is known as a 'universal life' policy. At the beginning, a significant portion of the premium is used to cover life insurance, and the remainder (after expenses) is invested. As the investment portion grows, the requirement for life cover diminishes.
The life insurance company uses mortality tables to calculate the risk of Sean dying within the next year. These tables show the proportion of people that die at each age. Between the ages of 40 and 41, roughly 0.2% or 2 out of every 1000 people of that age die. The statistics vary from country to country, by gender and by race. For a white male the risk is 0.25% or 2.5 per 1000. Females have a much lower chance of dying! As the age increases, so does the risk.
Being healthy, Sean's risk of dying is actually less than that of the general population.
The risk of death for the first year is 0.25% or 1 in 400. The cost of $1m life cover for the year is $2,500 or $208.33 per month. The insurance company need to do more than simply break even. So the odds are changed to favour the insurance company. Life cover is charged at 0.4% - $4000 for the first year. Broker's commission is paid at 85% of the first year's premium - $10,200. Expenses are calculated at an additional $134 per month. So the first year's costs amount to $15,808 (Risk Cover $4,000 + Commission $10,200 + expenses $1,608) from the $12,000 premium. At the end of year 1, the policy shows a shortfall of $3808. In the second year some funds will become available for investment. Commission, expenses and the margin on life insurance may vary according to the company and the country, but the principle is the same.
5 years later Cindy has a shock visit from the police. Sean has been killed in a terrible motor accident. The family are devastated. The life company are informed and a claim initiated. But the family are in for another shock. Under huge stress at work, Sean had taken to smoking a few months earlier. He did not think of telling the insurance company. The insurance company discovered this and refuted the claim on the basis of non-disclosure. Sean had been covered as a non-smoker.
Non-disclosure refers to anything that could materially affect the risk but is not disclosed to the insurer. Smoking is one of these risks. Others would be undisclosed health history. Had Sean told the life company, the family would have been paid the $1m. Had Sean lived, the investment portion would have grown.
Life insurance can be seen as a wager. The premium is the bet. The risk-cover the prize. As long as the premium is paid, the cover will remain. The client wins if he dies as long as he has disclosed everything.
The Jamesons own two cars, a modern home and have some savings. The house is mortgaged to the bank and the cars have been financed through the bank's Motor Finance division.
Sean was already running late for the regular Monday morning management meeting when he received a call from the bank's broker. He hastily agreed to a meeting with the broker.
The meeting took place at the Jameson's home in the early evening. Sean and Cindy were brought face to face with the bare facts. If anything happened to Sean, the family would be all but destitute. Their savings would last a year at most and Cindy would probably lose the house and cars. The private school would have to go.
This huge risk could be covered by a life insurance policy. The needs analysis' revealed that a capital sum of at least $1 million will be required as an investment to ensure that the family could maintain their lifestyle in the event of his death. The broker's plan will provide the required capital. A part investment, part life cover mix. In just 25 years the premium of $1000 per month will have turned into an illustrated $1 million and the family will be protected. The premium will increase by 5% each year. In addition, the policy would include disability cover at no charge! The broker completes the form, Sean signs and undergoes the required medical tests.
The policy is known as a 'universal life' policy. At the beginning, a significant portion of the premium is used to cover life insurance, and the remainder (after expenses) is invested. As the investment portion grows, the requirement for life cover diminishes.
The life insurance company uses mortality tables to calculate the risk of Sean dying within the next year. These tables show the proportion of people that die at each age. Between the ages of 40 and 41, roughly 0.2% or 2 out of every 1000 people of that age die. The statistics vary from country to country, by gender and by race. For a white male the risk is 0.25% or 2.5 per 1000. Females have a much lower chance of dying! As the age increases, so does the risk.
Being healthy, Sean's risk of dying is actually less than that of the general population.
The risk of death for the first year is 0.25% or 1 in 400. The cost of $1m life cover for the year is $2,500 or $208.33 per month. The insurance company need to do more than simply break even. So the odds are changed to favour the insurance company. Life cover is charged at 0.4% - $4000 for the first year. Broker's commission is paid at 85% of the first year's premium - $10,200. Expenses are calculated at an additional $134 per month. So the first year's costs amount to $15,808 (Risk Cover $4,000 + Commission $10,200 + expenses $1,608) from the $12,000 premium. At the end of year 1, the policy shows a shortfall of $3808. In the second year some funds will become available for investment. Commission, expenses and the margin on life insurance may vary according to the company and the country, but the principle is the same.
5 years later Cindy has a shock visit from the police. Sean has been killed in a terrible motor accident. The family are devastated. The life company are informed and a claim initiated. But the family are in for another shock. Under huge stress at work, Sean had taken to smoking a few months earlier. He did not think of telling the insurance company. The insurance company discovered this and refuted the claim on the basis of non-disclosure. Sean had been covered as a non-smoker.
Non-disclosure refers to anything that could materially affect the risk but is not disclosed to the insurer. Smoking is one of these risks. Others would be undisclosed health history. Had Sean told the life company, the family would have been paid the $1m. Had Sean lived, the investment portion would have grown.
Life insurance can be seen as a wager. The premium is the bet. The risk-cover the prize. As long as the premium is paid, the cover will remain. The client wins if he dies as long as he has disclosed everything.
Subscribe to:
Posts (Atom)