Dragan Financial

Life insurance is one of the most widely owned financial instruments because it can fulfill so many different needs. While the overriding need for most people is to provide financial security for those who are dependent, in one way or another, on a bread-winners income, the specific reasons people buy it are wide-ranging. If you ask 10 different people why they purchased their life insurance policy you are likely to get 10 different reasons. Here are the most common reasons to buy life insurance:

Not to be a Burden

This is probably the number one reason why younger, single people will buy an insurance policy. Even though they are not married or they don’t have anyone who is dependent on them for security, they recognize that their death will create a financial burden on someone. Most single people have accumulated debt that needs to be repaid, and they realize that there will be some final expenses that have to be paid. Unfortunately, it is a minority of single people who understand their responsibilities in this way as many leave the financial burden of debts and final expenses to others.

Keep my Family in their Place

This is the number one reason why married bread-winners buy life insurance as they don’t want to imagine their surviving family members suffering any decline in life style or security. The most responsible of these will want to see their family be able to stay in their home, continue to attend the local schools dressed in nice clothes, and to fulfill the dreams they have for their children. So, their life insurance coverage will be sufficient to pay off the mortgage, provide a continuing income stream to meet lifestyle needs, and set up a fund for college expenses.

It’s the Right Thing to do

For whatever actual needs they might have, these people feel an overwhelming sense of responsibility as individuals to make sure that their obligations are met. It is likely that they benefited from the proceeds of a life insurance policy, or, at the very least, were instilled with the virtues of life insurance by their parents. In many cases, people with a strong sense of responsibility will buy life insurance and even before their situation requires it because it is the right thing to do.

Leave a Legacy

Many people envision themselves building a successful career or business that will enable them to enjoy all of the fruits of life. Unfortunately, life gets off track and these dreams are not always realized. Misfortune, premature death, or just simple bad luck can derail the best laid plans, but, for some people, their desire to leave a legacy, to leave a better life behind for their children and children’s children is the reason why they will own life insurance well into their lives. Some people have even bought life insurance at a later age for this purpose when it became apparent that the legacy they created on their own would not be sufficient.

For the successful people who have created substantial legacies, the desire to have as much of it pass on to their heirs as possible, unencumbered by taxes and settlement costs, will buy life insurance through an irremovable trust for the express purpose of paying for these expenses and providing liquidity for the estate.

Keep a Business Alive

Following the great recession of 2008, a record number of people started new businesses which accelerated a trend that began in the late 1990s. As a result, the future financial security of many families is reliant upon the success and the continuity of a small business. Business owners are the first to recognize that the business not only provides a current income stream for the family, but it also provides a financial security for future generations. Life insurance is the only solution that can provide the capital a business usually needs to be able to continue when a business owner or partner dies.

I Love my Family

Life insurance is as much an emotional purchase as it is practical. Yes, it will pay for the needs and wants of a surviving family, but it also considered to be the most unselfish act of love and devotion to family that a person can express. Yes, it is the responsible and right thing to do, but some people buy it because of how it makes them and their families feel about each other.

My Spouse Made Me Buy It

It’s not uncommon for people to avoid buying life insurance or procrastinate as long as possible. Some people can’t stand the thought of the process for buying it. Others don’t want to think about the possibility of their family actually needing to use it. There are even some who imagine that their spouses will just take the money and run off with another partner. For whatever reason, many bread-winners need to be cajoled into do what is right.

Spouses who insist on their partner buying life insurance do so out of real concerns over their financial future should the unthinkable happen. Spouses who need to brow-beaten into buying life insurance need to understand that their partners don’t understand why the person who supposedly loves them wouldn’t commit the ultimate act of love and devotion by protecting their financial security.

Summary

Most people have a need for life insurance, but it is usually the underlying reason why they want it that gets them out the door or onto the computer to go find it. Life insurance companies also offer annuities rates. People will buy life insurance when their reason becomes clear to them. Whatever the reason is, it is always the right reason if it makes them act on such an important purchase.

One of the problems many people face in getting life insurance is that life insurers are fairly particular about the conditions under which they will issue it, and while they are inclined to offer it to most people, they will only do so at a steep cost if certain conditions are present. Many people fall within the classification of “high risk” based on the activities in which they participate or the medical condition they have. Understanding how high risk insurance works is critical for these people who need life insurance, but may have difficulty obtaining it.

High Risk Defined

Life insurers classify certain people as high risk based on two primary reasons: They participate in what they deem to be hazardous activities or occupations, or they have a medical condition that falls they consider to be a higher mortality risk.

Hazardous activities or occupations include scuba diving, aviation activities, foreign travel to countries on a watch list, or simply driving if you have a record of violations or driving under the influence charges. High risk medical conditions include heart conditions, diabetes type I or II, obesity, elevated liver enzymes, sleep apnea and hepatitis B or C.

Medical underwriters from the various life insurance companies apply their own set of criteria, measurement and judgment to ascertain the level of risk that these conditions present to the company, and apply their own ratings systems to determine what their assumption of the risks will cost the insured if they are willing to issue a policy.

High Risk doesn’t mean No Insurance

The good news for high risk individuals is that medical underwriters are now applying clinical techniques to evaluate mortality risk with a greater reliance upon the advances of medical science and how lifestyle changes can impact life expectancy. Recognizing that medical advances and abrupt life style changes can extend lives significantly, life insurers have expanded the range of high risk situations they are willing to approve.

With all of your medical information before them, underwriters will determine the risk costs the insurer will undertake to provide coverage based on risk classifications. Each classification has its own pricing table that is based on age, gender and the amount of insurance. If a high risk individual can be placed in one of the classifications they will be offered a policy.

Risk Classifications:

• Super Preferred or Preferred Plus

• Preferred

• Standard (there may be several classifications of standard)

• Sub-standard

Pricing High Risk Policies

The very best rates are offered to super preferred cases. A very small percentage of applicants are able to qualify for these rates. Most cases that are considered to be low risk are issued preferred status. If a minor medical condition is present, a standard rate will apply which is typically about 25% above the preferred rate.

If the policy is rated sub-standard it will then fall within another classification based on lettered tables that contain their own pricing structure. The tables are lettered from “A” to “J”. Sub-standard rates are based on an incremental percentage increase over the next lowest letter rating. For instance, an “A” rated policy is likely to priced 25% higher than a standard rated policy. Then, a “B” rated policy might be priced 25% higher than an “A” rated policy, and so on.

The difference in table ratings is the degree to which they consider a certain condition to be a higher risk factor. For instance, a person with diabetes that is under control may be able to qualify for a table “A” rating while someone who has diabetes in combination with other medical conditions may fall within a table “D” classification.

The difference in ratings is also determined by the length of history behind a medical condition. A recent cancer onslaught would be rated much higher than a cancer condition that existed more than five years ago. Often times an escalated rating is applied when multiple conditions are present that increase the mortality risk, such as diabetes or abnormal EKG readings complicated by excessive weight.

Alternatively, the insurer could apply a flat dollar rating instead of or in addition to a letter rating, such as $2.00 for every $1,000 of life insurance coverage. In many cases, these dollar ratings are assigned temporarily depending on the condition for which it is applied. For instance, if the insured is in the recovery phase of

Applying for High Risk Coverage

The adage, “people who actually need life insurance can’t get it”, has never really been totally true, but now, with the advances in medical science, it may only still apply to the few unfortunate people whose conditions are deemed to be terminal or beyond the level of risk an insurer is willing to assume, even at a steep cost. For everyone with “high risk” conditions, obtaining life insurance is not only a possibility, it is very likely if they follow the right procedures in applying for it.

A common mistake that people make in this situation is that they apply with several different companies in the hopes of finding the one that will rate their policy the most favorably. The reality is that this approach could jeopardize your chances of not only getting a favorable rating, but of getting a policy at all.

It is important to know that the results of any underwriting decision are reported to the Medical Information Bureau (MIB) which contains all of your medical information and history. It is all the primary source of information used by underwriters in the evaluation of your application. If it is found that you have applied to other insurers and have been turned down or have received a table rating, the insurer uses that information in its own evaluation.

The best course of action is to work with a knowledgeable and well-connected insurance broker who can identify the life insurers most likely to consider your situation with more favor. They should have extensive experience matching high risk individuals with the right companies based on the risk and a company’s propensity to underwrite certain risks. They are the best positioned to shop your case to the companies that are most likely to undertake your risk.

Also, they should be experienced in guiding individuals through the application process including the medical underwriting requirements. Often times, they can be influential in reasoning with the insurer on obtaining a more favorable rating.

Most people who buy term insurance are satisfied that they are paying less for their coverage than they would with a permanent life insurance plan. Still, many might feel that, after 20 or 30 years of paying into a policy without ever needing it, is like throwing money down the drain. Of course, their survivors wouldn’t feel the same way if it was actually needed. The life insurance industry responded with a plan that appeals to those who would find even more satisfaction if they actually received back all of the premium they paid into the policy making them feel as if they got something for nothing. Enter return of premium life insurance (ROP).

ROP Basics

The concept of return of premium life insurance is very simple. It is nothing more than a regular 15, 20 or 30 year term policy with a fixed, level premium paid on a level death benefit. At the end of the term, and if you are still alive, the life insurer will return to you your entire premium. If the policy is canceled before the end of the term, you will only receive a partial return, such as 10% of premium paid after 10 years, or 25% after 20 years. Also, if your policy was rated where you had to pay an extra rate, or you added any riders, you won’t see a return of these added charges.

The big difference between regular term and ROP is the cost. Generally, the premiums paid on ROP are about three times higher. For instance, a 30 year old male who paid $220 a year for $500,000 of term coverage would pay as much as $660 for an ROP. Why the difference? Well, in order for the life insurer to be able to give you back your money after 20 or 30 years, they need to have been able to earn a return on that money as a cost for holding it for you. Make sense? Probably not, but they have somehow determined that this extra premium covers the cost of their risk while holding out the opportunity for you to receive your money back.

Is ROP Insurance the Best Use of Your Money

And that brings us to the main criticism of ROP insurance which is the opportunity you give up to earn a better return than 0% over those years. But that may be unfounded for two reasons. First, it assumes that you can earn a better rate on savings for the entire 30 years. Second, with a buy-term-save-the-difference strategy you are still giving up the term premium. After taking into account taxes, the ROP strategy may actually prove to be a better overall return.

In the above example, the person could have purchased a regular term policy and put the difference of $440 annually into a savings account. If it were invested annually for 30 years at 4% the resulting balance would be $20,835 after taxes (30% combined federal and state taxes) as compared with the return of premium which would total $19,800 a difference of about $1,000.

There are three big assumptions here that make the $1,000 advantage possible. The first is that you can actually earn an average rate of 4% a year for 30 years. The current savings rate is about 1%. The second, is that your tax rate doesn’t increase over that time. And, third, that you even manage to think about taking the $440 and actually putting it into savings as opposed to spending it. If any one of these assumptions fall short, then it’s possible that the ROP could actually outperform the buy-term-save-the-difference strategy.

ROP Advantages:

Affordable: Generally still less expensive than permanent life insurance, although you might be able to find a universal life policy with rates fairly close to an ROP.

Double peace-of-mind: There’s nothing like the peace-of-mind knowing that you are getting peace-of-mind for free.

Easy to buy: It’s as easy as buying any other term policy. Shop and compare. Best course is to buy from a highly rated company.

ROP Disadvantages:

No return on investment: While it’s true that you have given the life insurer free use of your money, at least you are getting a return of your investment which is more than some investors can say.

You can do better on your own: You can take the difference in premium and invest it in a high yielding savings account, mutual funds. Best course is to make sure you are maxing out your qualified plan contributions. But, the important thing is to remember to actually invest the difference, or you won’t do better.

Cancel early and you will lose: If you cancel before the end of the term you can still get a partial return of premium, but it is hefty price to pay considering the higher premium cost.

Summary

As with any life insurance decision, it is vitally important to do your homework, shop and compare. The amount of resources available on the internet makes that task very easy. Be sure to scratch out the numbers to see if ROP might make better sense based on your financial situation.

Periodically LIMRA, the Life Insurance Management Research Association, conducts a study on life insurance ownership in the United States. The findings are always interesting, but they can also be somewhat startling considering the current state of finances in the households of most Americans. In today’s economy, many Americans are struggling to keep up with rising prices and the savings rate continues to drop which portends disaster for the 35 million families who don’t have life insurance protection and who are unfortunate enough to lose a breadwinner. Here are a few more facts gleaned from the LIMRA report:

Life Insurance Ownership has Declined

Only 44 percent of families own an individual life insurance policy. This is the lowest percent of individual life insurance ownership in over 50 years, and it corresponds with the number of families, nearly 50% who say they don’t own enough life insurance which is a 50 year high. Of this latter group, affluent households are counted with up to one-third of that group saying they lack sufficient coverage.

No doubt that the declining ownership of life insurance can be attributed in large part to the declining state of the economy. However, the trend runs straight into the teeth of reality with nearly seven in 10 households recognizing that their financial situation would be disastrous if they were to lose the primary bread-winner.

A part of the problem can be attributed to the fact that 25% of households call their employer provided life insurance their protection plan. While it is certainly a more affordable alternative, the fact is that nearly 17% of households were negatively impacted by unemployment in 2009. Employer-based life insurance is not portable, and when the employed join the ranks of the unemployed they are most likely to also join the ranks of the uninsured. The big danger with relying solely upon employer-based insurance, is that when your job situation changes, and you need to buy some life insurance, you could find yourself uninsurable or the insurance unaffordable.

The study found that the number of people buying individual life insurance policies dropped again in 2009 to 9.4 million which is nearly half the amount that were issues in 1985. Some of this can be attributed to an aging population. During the 1980’s the Baby Boomers were in their peak earning years and were the largest group of life insurance buyers. With the smaller sized generations to follow, such as Gen X, Y and Millenniums, the number of potential life insurance owners has declined.

Economic Troubles and Shifting Priorities

As it turns out, the smaller number of people at the life insurance-buying age is not the only reason for the decline in life insurance sales. For 40% of Americans, life insurance is simply not one of their major priorities. The purchase of life insurance takes a back seat to debt reduction and savings for cash strapped families.

On the other side of the coin, 70% of middle-market households, which must include most Gen X and Y families, do recognize that life insurance is the most important financial planning tool and that is the best way to cover debt and income needs of surviving family members. Most of these families plan on buying life insurance but have not yet set or shifted their priorities. It is likely that many are simply procrastinating as life insurance owners have done in generations past.

Most People want to Buy – But they don’t Know How

The paradox presented by the study is both clear and understandable. Historically, people have always understood the importance of life insurance, and, according to the study, they still do. And, people have always had the intent to follow through and buy some. According to the study, 25% of households say they plan to buy life insurance sometime in the next year. But, in the next breath they admit that they are unlikely to follow through.

The challenge today, as it always has been, is that people are conflicted about buying life insurance because they don’t know enough about it, and they need help buying it. 24% of middle-market households admit that they don’t know how to buy life insurance for their needs, but they aren’t likely to reach out on their own to get the professional guidance they need. In fact, only 18% said that they would actually speak with a financial professional about their life insurance needs.

So, the fact that nearly 80% of households don’t currently have a personal life insurance or agent to turn to shouldn’t be very surprising. This is more the case with the younger generations, as Baby Boomers are more likely to be aligned with a financial professional for all of their financial needs.

The younger generations are turning more to the internet and social media sources for their financial information, and they are more likely to conduct their financial product shopping and comparison online. The good news is that there is no shortage of internet resources for learning about life insurance, and it has never been easier to shop and compare. The bad news is that it may take the destruction of many families’ financial situation to wake them up to the stark reality that their actions are more important than their intent. If you’re looking for products beyond life insurance, annuities explained is a great resource.

Facts and figures from LIMRA’s 2010 Life Insurance Ownership Study

When a life insurance company issues a policy it is, essentially, taking on an obligation that must be paid to beneficiaries in the event of your premature death. It’s “premature” because the life insurer doesn’t expect you to die until you have lived out your life expectancy at which point they will have collected enough premium and earned enough interest on it to cover the obligation. The life insurer expects that you will live up to the actuarial assumptions it made about your age, health, medical history and life style, which is why it is willing to assume the risk that you won’t. In order for it to do that, it needs to know more about you – inside and out, and that what the medical exam is all about.

You Want the Works or a la Carte?

If you are over the age of 40 and are applying for more than $100,000 of life insurance, you will be required to submit to a medical exam of some sort. A full-fledged exam includes a physical, urine specimen, blood work, EKG and x-rays. The lesser the amount of life insurance for which you apply, the lesser the medical requirements for underwriting. For instance, if, at age 40 you are only applying for $100,000, you may only be required to submit a urine sample in addition to completing a medical questionnaire. If you want $2 million of coverage you could expect to run the whole gamut of tests.

If you’re 35 or younger, applying for less than $250,000, you may only be asked for a urine sample and a blood specimen. But, the requirements vary from one company to the next. Another company may require a medical exam in the same situation.

The medical examination process, for most insurers, begins with a review of your medical history. In addition to answering some medical questions on Part I of your application, you will authorize the life insurer to access your complete medical dossier through the Medical Information Bureau (MIB). Chances are your records will reveal things that you had forgotten, however, the underwriters will frown on any information they uncover that conflicts with the information that you provided, so it is important to be totally forthcoming when answering their questions.

Next you will be scheduled for an exam. Most exams are conducted by a paramedical profession who will come to your home or office. The exams typically last less than twenty minutes and it consists of more questions about your history, measurements, and basic diagnostics such as blood pressure. They will also draw blood samples. All of their reporting is done on Part II of your insurance application. As part of Part II, and depending on the amount of insurance, the life insurer will also request an attending physician’s statement (APS) from your primary care physician.

For higher amounts of insurance, or if there are certain medical conditions involved, you may need to have your exam conducted by a physician with a bigger battery of tests including a stress EKG which measures your heart before, during and after walking briskly on the treadmill.

Underwriting requirements vary from one company to the next and many have specific requirements pertaining to non-smoking applicants, or for people who are older than age 60, or for people of a certain height-weight ratio. These are all variants that can affect the way your policy is priced.

It’s Up to the Underwriters

Once all of the requirements and reports are completed, it is all packaged up and sent to the underwriting team with the life insurer. If anything pops up on their radar in terms of a medical concern or questionable results of a test, they could order additional tests. In most cases, the underwriting review process is completed within 30 to 60 days at which point they will approve the policy as applied for, or modify it by applying a rating which will increase the premium amount.

Rated policies are a result of conditions found in the underwriting process that present a higher risk to the life insurer. They may have found that your blood pressure was above the norm, or that your height-weight ratio was just off. In many cases, ratings can be challenged if you will allow them to conduct some follow tests. For situations involving blood pressure and weight, it may be worth the extra testing if you can produce more favorable results.

Improving your Medical Exam Results

The results of your medical exam and the subsequent decision by the underwriters becomes a part of your medical history, so it would be important to approach your life insurance medical exam in the best possible condition. While you can’t cover up some medical conditions, there are ways to improve the results of the standard tests and diagnostics.

• Get at least two nights of sound sleep prior to your scheduled exam.

• Avoid alcohol for 24 hours prior to the exam.

• Avoid coffee, cola and other caffeinated drinks.

• Reduce your intake of sodium and high cholesterol foods 24 hours prior.

• Keep your physical activity low for 24 hours prior.