Is life insurance important in a recession?

Author: Tanisha Williams
Detroit is one of the cities that has been hit the hardest in this economic downturn. Detroit has suffered enormous job loss, lay offs and foreclosures. Many people wonder is insurance needed and is it affordable?

Well, the answer is yes. In hard times such as these, it is never smart to stop paying your life insurance premiums or for some not investing in at all. Life insurance offers many options to choose to protect your family.

Mortgage term insurance is the most cost effective way that a person can protect their family. By having this type of insurance in place, will allow for their mortgage to be paid off in full if the breadwinner were to die. Another option is traditional term insurance. This type of insurance can also cover your mortgage, final expenses, spousal and family income support or to ensure that your children will go to college. Term insurance in this economy is very affordable and needed more than ever.

I don't need life insurance, I'm only 35!

I was visiting my associate the other day and popped my head into her office to ask how her day was going. She had a puzzled look on her face and said, "I've had better days. Have you ever had to deliver on a life insurance claim?" The look on her face was one of complete and utter sadness. She went on to tell me that three years ago she had sat with her client to discuss life insurance. He was a young man with a wife and three children. He really believed that at the age of 35 he was too young to be seriously looking at life insurance. However, my associate saw it differently and continued to educate his wife and him. At the end of their conversation, he and his wife decided to apply for a life insurance policy in the amount of $1.5 million to protect him and his family. Little did they know that in three years time he would be killed quite unexpectedly by a drunk driver heading the wrong direction on the freeway on-ramp. My associate looked at me and said, "I can't believe I have to deliver this check."
Now contrast that story with one of my own. When I first got started in finance, I began as a life agent. I had met a very young couple, had connected with them, and made an appointment to discuss the need for life insurance. In the end we took out policies on both of them. A couple of years went by, and in financial terms, they had progressed rather nicely. They had purchased a second home, which was part of their plan and she was pregnant with their first child. It was a very happy time for them. But with the new mortgage and a baby on the way, they had let their insurance lapse. I made several calls to them to reinstate the insurance however they were all to no avail. Sadly, at the age of 32 and on Thanksgiving Day, Sam (not his real name) was hit head-on while on his motorcycle by an RV traveling in his lane. He was killed instantly -- he never knew what hit him. The saddest part is he and his wife had just celebrated the birth of their first child not more than 60 days before hand. Sam left his wife and son essentially penniless. She had quit her job to raise their boy and Sam, as the primary breadwinner, was no longer there. Their original plan was for her to stay home and raise their boy. However now she was juggling grief, raising their son on her own, and working two days a week to make ends meet.
To finish the story, she sold the second home to cover the costs of burying Sam and providing income so she could stay home and take care of their beloved baby. They were very fortunate in the fact that she was able to sell the home quite quickly -- that would not be the case today.
Life insurance can feel like a catch 22. For some folks they feel that if they get life insurance it means they're going to die and so they don't. But for others who understand the purpose and the need of life insurance, it saves them from a tragic financial nightmare. My associate's surviving family although grieving for the loss of their beloved husband and father, will soon have the financial resources to take care of anything they need, with proper management, for the rest of their lives. My clients on the other hand have to abandon their future plans in order to provide for their family.
None of us are planning on leaving this earth before our time. However for some of us "our time" comes much earlier in life than we would prefer. Preparing for the care of our families in this kind of tragedy is essential to the survival of the family, the fulfillment of life plans such as college educations, paying off the mortgage, and achieving other life goals that were important to the family before the unexpected death.
So I ask you, which family would you rather be in at the time of crisis? The choice is yours.

Why get life insurance?

Author: Edwin Markar

In this article, I’m going to go over the reasons behind getting life insurance, but will not get into specific types; I’m saving that for upcoming articles deliberately to not steal the shine away from the underlying reason for purchasing it.

Life insurance is primarily purchased to provide those you care about financial protection, should you pass away. Some use it to cover estate taxes or business dealings, but in this particular article, I will focus on ordinary family needs.

It’s common for people to search online for sites that can tell them how much life insurance they need. I can tell you from experience that there is no such rule of thumb (such as replacement of 10 times income) that can fit to your needs and wants. Ask yourself, if you didn’t wake up this morning, would you want your family to continue living in the same house? What is the remaining mortgage on it? Would you like to have money set aside to make sure your kids can attend the University of their choosing? Would you like to replace some of your income? Would you like to cover your burial expense, which could cost around $10,000?

Be honest with yourself when answering these questions, it will help you reach an insurance amount you are comfortable with, and nobody will, or should, judge you for it.

Who is a candidate for life insurance? Anyone who wants to sleep better at night knowing their loved ones won’t suffer financial hardship while grieving the loss of someone they cared about. It makes a bad situation more manageable, and that is the best we can do, since we can’t change reality.

You don’t have to currently have dependants in order to justify owning a life insurance policy. It is, the vast majority of the time, less costly when you get it when you are young, and the premium goes up every year that you put it off, therefore you can lock in low rates while you are young and pay the same locked in premium even as you get older.

Finding the Right Life Insurance Policy

TheStreet.com rates the financial strength of 900 life insurers nationwide to help consumers find sound companies to do business with. TheStreet.com Ratings has been recognized as the most conservative grader of life insurance financial strength by a leading consumer publication and was singled out as the only ratings agency that doesn’t accept payment from any of the companies it rates.

American Life Insurance Company, a unit of AIG (Stock Quote: AIG), is the largest life insurer in the U.S., with nearly twice as much premium volume as the next largest insurer, Northwestern Mutual. There are many companies in excellent financial shape that you should consider when you’re shopping for life insurance. Go to TheStreet.com to look up your specific company.

Life insurance comes in many flavors, each designed to suit a specific need. For instance, there are policies that will pay off the balance on your mortgage. There are policies that will provide your family with a specified income stream for a fixed number of years after your death. There are policies where the benefit goes up in value as you get older. And there are even policies where the benefit goes down in value as you get older.

When you boil it all down, though, there are really only two fundamental types of life insurance policies: permanent life and term life.

Permanent Life
As the name would suggest, permanent life is a lifetime insurance policy. You might also think of it as life insurance with a savings account built in. With permanent life, a portion of the premiums you pay to the insurance company go toward establishing a “cash value” which can be withdrawn if you cancel the policy or may potentially be used to pay for future premiums on the policy. And unless you exhaust your cash value, your beneficiaries are guaranteed to receive the death benefit when you pass.

So in a way, a permanent life policy is like an investment with a life insurance component. It is particularly useful for individuals who are concerned about their ability to pay premiums in later years or for those lacking the discipline to establish a separate savings plan.

Term Life
Term life, on the other hand, provides insurance coverage for only a specified period of time. The death benefit is only paid if you die during that specified term and have paid the required premiums. At the end of the term, however, the policy expires and you walk away with nothing to show. There is no cash value built up and your insurance coverage ceases to exist unless you purchase another policy.

In other words, term life insurance provides temporary coverage. If you live past the end of the term, you will have made years of premium payments but receive no money in return from the insurer. Of course, if you were to die at the beginning of the term, you would have paid very little in the way of premiums and yet the insurance company would have to pay your beneficiaries the full policy benefit.

At first blush, term life insurance may not sound as appealing as permanent life. That is, until you get to the cost. The premiums for a term life policy can be considerably less expensive than those for a permanent life policy. That’s because with term life, you’re not contributing anything extra to build up a cash value. Instead, you’re only paying for the insurance coverage plus the insurer’s administrative expenses.

When Life Insurance Becomes a Liability

People who are less wealthy suddenly need a bigger policy to protect their families. People whose policy investments have been battered face unexpected premium increases. And even those who feel adequately insured at affordable prices are worried about their insurers’ ability to meet financial commitments.

In addition to investment losses, premium increases have shocked many people. “This is a real issue for clients who own variable policies,” said Loretta Nolan, president of Loretta Nolan Associates, a certified financial planner in Old Greenwich, Conn.

These policies combine insurance protection with a tax-deferred investment account that helps to pay the premiums. During the bull market, they promised investment returns high enough to limit the size and duration of premium payments. But the marketers didn’t stress the downside: if investment performance falls short, policyholders must spend more on premiums.

And that’s what has happened. Now, policyholders must pay higher premiums, for more years, to maintain their current level of insurance. The alternative is to reduce the coverage, which sometimes leads to a surrender charge.

If you’re in this situation, do a policy stress test, advised Ms. Nolan: ask the insurer to project your future premiums, assuming the policy investments earn a modest 4 percent return. If that shows you can’t afford the premiums, you need to consider alternatives.

If your priority is keeping your insurance, Ms. Nolan suggested replacing some of your variable coverage with a less-expensive term policy. For example, if you have a $500,000 variable policy, you might buy $300,000 of term insurance and trim your variable policy to $200,000, keeping your total premiums affordable. But if you see the variable policy chiefly as an investment loss — and don’t need the insurance — you might want to exchange it for an annuity, said Glenn Daily, a fee-only insurance consultant in Manhattan. The exchange is a tax-free transaction (called a 1035 exchange) that lets you use your loss to offset taxes on future gains. If you lost $30,000 in the variable policy, for example, your first $30,000 of gain in the annuity would be tax-free.

If your net worth has taken a 30 percent hit, advisers say you probably need more insurance to protect your family, at least until your stock portfolio and your home regain value.

Determining how much you need is more an art than a science, said Richard B. Freeman of Round Table Services, a Westport, Conn., wealth management firm. Instead of relying on a software program that would probably recommend more than you would ever buy, he suggested that you think in terms of two lump sums — one to pay off your mortgage and cover your children’s college education and the other to create income for your survivors.

A nonworking spouse needs insurance, too, added Mr. Freeman: “If Mom’s home with the kids, her policy has to do more than hire a nanny and a housekeeper. It should be big enough to let Dad take a job with shorter hours closer to home, so he can have more time with the kids if he’s the surviving parent.”

The cheapest way to increase your coverage is with term insurance, often available in a group plan through your employer. But that is not necessarily the cheapest way to buy it. If you’re healthy, you might get a better deal by shopping for an individual term policy, said Mark Cortazzo, senior partner at Macro Consulting Group, a Parsippany, N.J., financial adviser, especially if you’re a woman in a state with unisex rating for group insurance.

If you’re in poor health, you might want to buy as much group insurance as possible at work. You can usually convert it to an individual policy without evidence of insurability, albeit at a price, when you leave the job, Mr. Cortazzo said.

If you have serious health problems, you should avoid the standard application process for individual coverage because your application will probably be rejected after the medical exam. With each rejection it is harder to find coverage.

Instead, you should enlist a broker who specializes in the high-risk market to present your case informally to insurers. He can make sure you formally apply only to those companies that will accept you. You may soon have more options if insurers with highly publicized financial difficulties relax their underwriting standards to maintain their sales volume, said Wil Heupel, managing principal of Accredited Investors, a Minneapolis financial planning firm.

So how do you avoid buying insurance from a company whose health is worse than your own? Advisers say that if you’re buying more than $3 million in coverage it’s prudent to diversify among several highly rated companies.

“Work with a broker who sells the policies of many carriers,” Mr. Freeman said. An agent represents only one, whose problems he may minimize.

Banks Use Life Insurance to Fund Bonuses

By ELLEN E. SCHULTZ

Banks are using a little-known tactic to help pay bonuses, deferred pay and pensions they owe executives: They're holding life-insurance policies on hundreds of thousands of their workers, with themselves as the beneficiaries.

Banks took out much of this life insurance during the mortgage bubble, when executives' pay -- and the IOUs for their deferred compensation -- surged, and banking regulators affirmed the use of life insurance as a way to finance executive pay and benefits.


Bank of America Corp. has the most life insurance on employees: $17.3 billion at the end of the first quarter, according to bank filings. Wachovia Corp. has $12 billion, J.P. Morgan Chase & Co. has $11.1 billion and Wells Fargo & Co. has $5.7 billion. (Wells Fargo acquired Wachovia at the end of last year.)

The insurance policies essentially are informal pension funds for executives: Companies deposit money into the contracts, which are like big, nondeductible IRAs, and allocate the cash among investments that grow tax-free. Over time, employers receive tax-free death benefits when employees, former employees and retirees die.

Though not improper, the practice is similar to what is known as "janitors insurance," an insurance-on-employees technique that has long been controversial. Critics say the banks' insurance contracts are a way for companies to create tax breaks for funding executive pensions. And some families have complained that employers shouldn't profit from the deaths of their loved ones.
[life-insurance policies on bank employees]

Efforts to rein in the practice largely have been unsuccessful, including the most recent rules Congress enacted in 2006. The rules limit companies to buying life insurance to just the top third of earners, who must provide consent. But the rules don't apply to life-insurance that employers bought before the August 2006 rules, which cover millions of current and former employees.

Banks are far from alone in buying such company-owned life insurance, or COLI. Thousands of companies do it, including American International Group Inc., Fannie Mae, Freddie Mac, Kimberly-Clark Corp. and Tyson Foods, Inc. But banks have been among the largest players, pumping billions more into new policies since the 2006 rules were put in place.

Last week, the Treasury proposed eliminating companies' ability to deduct interest on loans related to COLI. This would have little impact on banks, which don't borrow money to invest in life insurance. The proposal would also leave untouched the major tax breaks of the practice.

Banks had a total of $122.3 billion in life insurance on employees at the end of 2008, nearly double the $65.8 billion they held at the end of 2004, according to a Wall Street Journal analysis of bank filings. Unlike other companies, banks are required to disclose their total life-insurance holdings in regulatory filings.

In recent years, the Office of the Comptroller of the Currency affirmed that banks can buy life insurance to finance employee benefits. But filings show that executive compensation accounts for most of the benefits.

J.P. Morgan, for instance, had $10 billion in deferred-pay obligations, compared with $1 billion in retiree health obligations at the end of 2008. Offsetting these obligations was $12 billion in bank-owned life insurance, or BOLI. A spokesman for J.P. Morgan confirms the figures.

Citigroup Inc. had $919 million in unfunded retiree-health obligations, $586 million in supplemental executive pension obligations, and roughly $5 billion in deferred compensation. Offsetting these obligations: $4.2 billion in life insurance. A spokesman says Citigroup bought BOLI because it was "an attractive use of capital," and for "the tax-free nature of the death proceeds."

Bank of America doesn't disclose its deferred-compensation obligations, but filings show that at the end of 2008, its retiree health plan had an unfunded obligation of $1.3 billion, and that it owed $1.3 billion in supplemental executive pensions. The bank had a total of $17.1 billion in life insurance, which suggests a substantial deferred-compensation obligation. A BofA spokeswoman declined to comment on the deferred compensation obligation, but in an email said: "Like many companies, Bank of America uses this insurance to help defray the cost of employee benefits."

Companies don't use the policies as piggy banks to pay for compensation and benefits. Rather, they benefit from keeping the money in the contracts: Thanks to accounting rules for life insurance, gains on the investments -- from stocks, hedge funds, bonds and the like -- aren't just tax free, but are reported as income each quarter. Otherwise, companies couldn't add gains from securities as income until they sold them, and they would be taxed.

This income reduces the drag that executive IOUs have on earnings. (Banks owe interest on the deferred pay; and like any other kind of debt, the interest on executive debt lowers earnings.)

Though the investments are illiquid, the banks receive tax-free cash when employees and former employees die. Pacific State Bancorp, of Stockton, Calif., recently reported $2.6 million in income from a death benefit in 2008. The company didn't respond to requests for comment.

A subsidiary of Conseco Inc., Bankers Life & Casualty, which bought life insurance on employees in 2006, received $2.7 million that year from a death benefit, according to filings. A spokesman says the life insurance company bought the insurance "to offset the expense of deferred compensation."

Over the coming decades, banks will receive an estimated $400 billion in death benefits, consultants estimate. The death benefits sometimes are referred to in filings as "mortality dividends" or "yields." Employers track the deaths of former employees by checking Social Security Administration records.

As an incentive to get employees to consent to being covered, some companies offer them a small portion of the death benefit. But the coverage may end when they leave the company.

In December, Irma Johnson accidentally received a check for $1.6 million, from Security Life of Denver Insurance Co., payable to Amegy Bank. According to a lawsuit Mrs. Johnson filed in February in a Houston state court, in 2001 the bank told her husband, Daniel Johnson, a credit risk manager who had survived two brain surgeries, that he was eligible for supplemental life insurance of $150,000, if he signed a consent form authorizing the bank to purchase an insurance policy on his life. Four months later, the bank fired him.

Mr. Johnson died from a brain tumor at age 41 in 2008. His widow and two young children received no life-insurance benefits, which the bank had canceled when Mr. Johnson left. Mrs. Johnson says her husband was cognitively disabled when he signed the consent form.

A spokeswoman for Amegy Bank, a unit of Zions Bancorp, declined to comment on the suit, but said, "Participation in Amegy's BOLI plan was completely voluntary; employees consented to participate."

It's an unavoidable fact of life: Life insurance premiums increase with age.

And then there's the matter of your health. If you develop certain medical conditions, life insurance suddenly becomes prohibitively expensive, if you can get it at all.

For good reason, then, people seek insurance that can be renewed regardless of any changes in health. That's where a renewable term life insurance policy can be a life-saver (for your survivors, at least).

The most important aspects of term life
Typically, when you buy a term insurance policy, you lock in a particular rate class that's based on your age, smoking habits, and health at the start of the term. When it comes time to renew a term policy, you can't do much about your age. You'll be older, so your rate will be higher. This much is entirely predictable and not worth worrying about or maneuvering to beat. That's where renew ability comes into play.
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Some "renewable" term policies just make it easy to renew, but require a medical exam, leaving you exposed to big problems should health issues surface later. What you want is guaranteed renewability without a medical exam. This is especially true if the policy term won't take you close to retirement age.

Besides that, there are three other key components to consider:

1. The policy term.
2. Guaranteed level premiums.
3. Ability to convert to a cash value policy.

The policy term
Term policies are either annually renewable (one-year term) or cover terms from five to 30 years (e.g., five, 10, 20, 30). Think of annually renewable term as the basic building block on which longer-term policies are built. If you pick a policy term beyond one year, you get two advantages:

* The total multiyear premium cost is spread out evenly over the policy term, rather than increasing each year, as you get older. For this reason, these policies are usually called "level term" policies.
* You can often get a better rate for longer terms, since the insurance company gets better odds that you won't switch policies during the term.

As with everything in life, though, there are trade-offs:

* When you buy a longer-term policy, it may look like you are paying a level premium, but you are really just over-paying in the early years to cover higher costs in later years. Therefore, if you decide to drop the policy before the term is over, you will have overpaid. For a 20-year term policy, for example, you will have grossly overpaid if you drop it after 10 years.
* If you have any outstanding questions about your life insurance needs, it's safer to buy a shorter-term policy until you get these questions squared away. It can be tough to accurately estimate how long you will need life insurance, especially if you expect to see a large inheritance, for example, or think you might be able to retire early.
* As you get older, your income replacement need gets smaller, as there are fewer and fewer years to cover before retirement. Buying shorter-term policies will allow you to reduce the death benefit of your policy accordingly, with each successive term renewal. Reduced death benefits mean reduced premiums.

It's tough to balance all these factors and make a recommendation that fits most individuals. It will always depend on who you are and what you need. In general, though, shorter terms provide more flexibility and the potential for cutting costs at renewal, while longer terms offer a better price for a given level of insurance over a given term, as well as greater predictability in price.

Guaranteed level premiums
Before you purchase a multiyear term policy, be sure that the premium is guaranteed to be level over the entire term. A surprising number of "level term" policies guarantee this for just a portion of the term. After this partial term is over, premiums might increase, although these increases are usually subject to some guaranteed maximum.

Ability to convert to a cash value policy
Getting a "convertible" term policy is generally a good idea. These are priced competitively with similar policies that don't include this provision, so you really have nothing to lose. This feature allows you to convert the policy to an equivalent cash value policy from the same company, without a medical exam, should there be a fundamental change in your health or retirement plans during the policy term.