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How To Buy Life Insurance Even Though It’s Confusing As Heck

The New Black Chick

The New Black ChickWe already know, statistically speaking, most black women are not adequately prepared for retirement, but what about for death? I know, no one likes to talk about what happens when (not if) a loved one dies. There are expenses to pay. Yes, even single women with no children need life insurance. Someone has to bury you and what about your estate? You worked hard for what you have, shouldn’t what remains of your earthly possessions be left to those who survive you instead of being farmed out to your debtors? This is what life insurance is for. The level of complexity varies if you are single or married, have children, age, health status and it can be very confusing.

The reason most people don’t have life insurance is because they think it’s expensive and there are competing financial priorities, such as kids, the mortgage, food. According to LIMRA’s Trends in Life Insurance Ownership study only 44% of US households have some type of life insurance in 2010 compared to 72% in 1960.

The World Life Expectancy site estimates black women have a life expectancy of 79 years, which is a couple of years shy of white women and six years longer than black males. That’s great news given that African Americans are more likely to own life insurance than their white counterparts. LIMRA sites that in 2010 African Americans were twice as likely to purchase life insurance for themselves or someone in their family. Their study further revealed that for 80% of African Americans their primary driver for buying life insurance was not being a burden on their families when they die. Funeral costs alone can range from $8,000 to $10,000. Typically the type of life insurance African Americans opt for is burial coverage. They go on to say that while most Americans in general recognize the need for life insurance they either don’t buy it or rely on inadequate coverage from their employers and don’t acquire supplemental coverage.

We can’t talk about creating and building wealth without talking about how to protect it. Life insurance is a part of protecting your wealth, especially for those you leave behind. If you’re single, your family won’t be responsible for paying your debts but they will likely need to come out of pocket to bury you if you don’t have life insurance. Your estate will be used to settle debts and what is left over will go to your family. Wouldn’t you rather leave something for your family? If you’re married, your spouse will assume debt in your name. Those costs could be significant, especially if it was a catastrophic illness that wasn’t entirely covered through health insurance. Buying life insurance can be confusing, but it doesn’t have to be and it doesn’t have to be expensive.

Types of Life Insurance

We’ve seen the commercials for life insurance. You know the ones where a couple of middle-age or elderly people are at the kitchen table drinking coffee discussing the need for life insurance. One person says how easily and cheaply they were able to secure life insurance for themselves. They often throw out some terms around different types of insurance. Let’s take a minute to discuss those at a high level.

Term Life Insurance

Term life is valid for a specified period of time. Once the time period is reached the policy holder must renew or buy another policy elsewhere. However, the same rates aren’t guaranteed and they may even go up. When the insured dies the benefit is paid out to the beneficiary of record. This is typically the cheapest type of policy to get. The period of time is typically between 10 to 30 years. It’s probably the least complex of all of the types of insurance. The biggest con of this type of life insurance is that when it expires, if you renew the same policy the premiums will likely jump significantly and the coverage terms may not be the same.

Permanent Life Insurance

There are three different kinds of permanent life insurance. These types of policies don’t have a set expiration date. They are designed to last your entire lifetime provided the premium payments are kept up. Another characteristic is cash value. This means some policies may allow you to borrow against the policy. Any loans against the policy will accrue interest. If you should die during this time your death benefit payout will be reduced by the amount of the loan against the policy. Here are the three types of permanent life insurance:

Whole Life Insurance

These policies have a fixed premium, you pay the same amount every month over the life of the policy provided you make no changes to it. Whole Life also provides steady growth on the cash value of the policy. The best way to understand this is to think of your policy as a certificate of deposit (COD). It will earn money over time and be worth more than when you originally bought it. This is called the internal rate of return, IRR. There is no set way to know what your policy will yield over time. Insurers, however, don’t typically disclose how they calculate IRR. You will likely need the help of a professional. Premiums for this type of insurance is usually high. You are allowed to borrow against the policy in accordance with the policy’s guidelines. If you decide to cancel (surrender) your policy you are entitled to a portion of the cash value you paid into the policy. This amount is determined by the insurer. There are various types of Whole Life insurance. This tends to be a good option to help with wealth creation as the cash value is an asset.

Universal Life Insurance

Universal Life has more flexible premiums. A minimum payment is required each year but you can change how much you pay. This may come in handy as life priorities change year to year. Much like a Whole Life policy, a Universal Life policy will gain in value depending on the specifics of the policy and the interest rates set by the insurer. Depending on the year a Universal policy can earn more or less than a Whole Life policy.

Variable Life Insurance

These policies allow you the flexibility to invest a portion of your premium in to separate accounts offered by the insurer. This is similar to how a mutual fund or 401K operates. Because you are diversifying the policy across different investment options the value of the policy will fluctuate based on the performance of the investments. This may potentially result in a higher return on your death benefit and cash value.

Employer Sponsored

This type of coverage can take many forms depending on what your employer offers. Some provide a minimal amount such as the cost of covering funeral costs while others allow you to have a salary multiple to determine coverage. This means that you can select 1 to 3 times your pay depending. If you make $50,000 per year and you opt for two times your salary, your death benefit will be $100,000. These policies are part of a pool, which, generally speaking, results in very low monthly premiums for a good amount of coverage. That $100,000 of coverage may only cost you $5 per month or $2.50 per check. Again, it is dependent on your employer. If you are an hourly employee your option may be to select a set amount of insurance, but still at a highly discounted rate. The salary multiple is great but may cap out. Meaning, if you determine you need $300,000 of insurance and your company only goes up to a multiple of two, you will need to buy an additional $200,000 worth of coverage on the open market. Your employer may also offer you the option to obtain the additional $200,000 through their carrier. If you leave the job you may or may not loose this benefit. They may offer to transfer the policy to you and you pay the full premium which could be a very expensive proposition. Be prepared to search for more insurance on your own. Also consider that if you are in your 40-50’s you may want to get external life insurance regardless. Many companies require a physical to determine your eligibility. As you get older the premiums get higher. It may worth getting another policy before leaving your employer. Even if it’s a small amount of coverage, you can up the death benefit later.

Determine The Best Policy For You

How do you know if term life or permanent life insurance is best for you? You need to determine your goals with life insurance, how much you require and how much you can afford per month.

Determine your goals. If your goal is to provide a death benefit for your family to cover bills and funeral costs consider opting for term life. It’s difficult to know the term to get. They usually cap out at 30 years. Remember a black woman is expected to live 79 years. Its possible to live way beyond that though. My paternal grandmother is 92 and my maternal grandmother is 84. If you have longevity in your family and you yourself are in great health in your 30-40’s, you may want something that will last beyond that time period. For example if you’re 35 and buy a 30-year policy when it expires at age 65 your premiums will sky rocket. Your life expectancy at that point is another 14 years. The insurer will want to mitigate the risk of paying out that policy in the short term.

If your goal is investment, because the permanent life insurance premiums you pay into the policy gains value over time they are worth more than when you bought them making them an asset. Many companies may highlight this benefit as a way to bolster retirement funds or pay for college. But that value may take as long as 10 years to be seen. Policies can be heavy on the expenses and commissions thus making them a long term investment. This makes using life insurance as an investment vehicle a very expensive option as opposed to 401K, IRA, mutual funds or the stock market. A self-directed IRA may be the better option if you’re looking at a Variable life insurance plan for instance. Some financial planning experts urge against using life insurance policies as an investment vehicle.

Calculate how much insurance you require. This should be fairly easy to calculate, but a financial planner can help you with this exercise. Factors to consider when determining the amount of coverage you need include but aren’t limited to:

  • Burial costs
  • Children (education, clothing, healthcare, etc)
  • Spouse
  • Annual salary/single or dual income
  • Outstanding debt (credit cars, mortgage, student loans, etc.)
  • Life expectancy
  • Insure the whole family

Let’s say in order to cover all of this you will require $200,00. The idea is to keep your family and/or your estate whole or better after your passing. For example, if you are a single income family what will your spouse need in order to continue raising the children, cover the mortgage, etc. without having a job? This is why you hear of some policies being in the millions because that’s what the surviving parent would need in order to maintain the household with young children. Typically, this benefit can be reduced once the children are grown. You may also want to consider insuring the whole family. If you are the bread winner you may want to consider having enough insurance on your spouse or children to cover a burial.

Understand how much you can pay per month. Dust off that budget to understand how much you can pay per month. How much you can pay may also impact how much coverage you can get. But knowing how much coverage you need will put you on the right path. You don’t necessarily require a financial planner to help you get your budget together, but if you’ve never done it before it may be worth it to ask for help.

How To Buy Life Insurance

Getting auto and health insurance can be relatively easy in terms of the mechanics. Most policies can be purchased online with minimal help required. Life insurance, on the other hand, is quite different. You will want to speak to different agents for quotes. When you meet with them take your goals, how much coverage you believe you need and how much you can afford per month. Based on the discussion you may find your needs change. Keep in mind that their job is to sell you on their products. That’s why you should meet with several people. You need to work with someone you trust. They will also have other products they want to sell you as part of your policy. Listen and evaluate those products outside of the discussion. These additional products will only up your premium. A tactic they will use is FUD – fear, uncertainty and doubt. They may throw a lot of “what if” scenarios at you. Don’t get overwhelmed by this. There is no way to prepare for every eventuality. Remember, your primary goals are to protect your wealth and to make sure your family comes out whole or slightly better. Some insurers will require a health exam by a physician of their choosing. Often times people with life-threatening illnesses can’t get coverage. It’s better to get a policy while you’re young and healthy.

If you are in your 50’s, 60’s, or 70’s life insurance may come with higher premiums. Your life expectancy and health status will be the two biggest factors at play in the premium price. There are policies that guarantee coverage and don’t require a physical exam. They may offer lower death benefits in return, such as to cover the cost of a burial. You may have to look around a bit more. The first place to start is with the company you work for or retired from, they may have a relationship with a carrier to provide discounts. Also look into retirement organizations such as AARP.

Here are some things to consider:

  • What are the rules of the policy (can you borrow, what’s the interest rate, etc.)
  • Can you up the coverage amount later, if so, any additional expenses
  • Due an annual review of your policy as it relates to your wealth management plan, make appropriate changes
  • Read and understand the fine print, for example, will the policy still pay out for acts of terrorism (unfortunately this is a reality of the world we live in)
  • Check the company’s ratings, even if it’s a big well-known company
  • How quickly do they pay out death benefits
  • The younger and healthier you are, the lower your premiums
  • Supplement your employer provided life insurance and/or considering buying additional insurance in preparation for coming off of that policy

The good news is that black women have a long life expectancy and African Americans are more likely than any other race to purchase life insurance. Protecting our assets is as important is acquiring them. Although black women have a gap in wealth creation and retirement planning, we are doing well with preparations for life after death. If you haven’t already, it’s a great time to get started on your financial plans. Spend some time on your own gathering important information and determine where you need help. Women in general are the least likely to visit a financial planner yet women control most of the world’s wealth. Something to think about. If you found this post helpful or have additional tips please share and comment below. We want to hear from you.

REAL TALK | REAL THINGS | REAL RESULTS

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