Money Matters: Life insurance and its need and use

Today, the conversation surrounding life insurance is very different from my early years in this profession and from the time when I first started work. I am not sure all of the conversations are actually better, but they are different.

For most of my clients past 70 years of age, they generally have one or two small policies they purchased during their early working years. At that time, $5,000 to $20,000 was frequently the amount purchased and generally considered a large policy. Today, this amount is a far cry from what is needed, but 40 years ago a 2,500 square foot home could be purchased for around $20,000 in many parts of the country. The type of policy was almost always a Whole Life plan.

Premiums were to be paid forever, and the policy would accumulate a small cash value as the premiums were paid.

Looking at these plans today, they rarely provide much benefit to the beneficiaries beyond paying part of the final expenses. The cash value never grew substantially on many of these plans, so numerous seniors have determined the best action was to cash in the plan. While many life insurance plans are designed to be kept until the benefit is paid, such
as the Whole Life Plan, they do not always last the decades as efficiently as one would hope.

Life insurance policies are contracts, and thus many of their features or costs are locked in by the policy or contract. Thus over time when conditions change, expenses go up or down, and life expectancy lengthens, all of these changes impact the life insurance industry, new policy design, and in many cases may make a once desirable plan become an inefficient plan.

Life insurance like other costs should be reviewed periodically and updated when appropriate. However, there is a point in your life when it is no longer feasible to consider updating older policies. That date will vary for everyone and is based upon personal health, financial need, and ability to pay higher premiums if required.

Jumping into a new plan just because your current insurance is old is not always the best solution. New plans carry with them new commissions, surrender fees start over with many new plans, and in some cases the contestability clause is renewed. These factors may determine the best course of action is to keep your old plan rather than to make a change.

Therefore, an evaluation is very important prior to making any change.

A number of years ago the life insurance industry went through a major shift in product design, and this shift impacted product pricing. Instead of life insurance being designed to meet a need today and a need in the future during retirement, the focus narrowed to the next decade rather than a lifetime. This change started individuals asking themselves how much protection I need for the next ten years rather than for a lifetime. This move made Whole Life too costly when compared to the cost of term coverage, and thus the change to term policies as the primary coverage began.

With a lower premium, more money was available to support lifestyle expenses. But, a very conservative savings plan also disappeared, since Term plans do not build value. More importantly, individuals stopped looking at the long-term in my opinion and only wanted to know what the benefit was today. Today, many of the 30, 40, and 50 year-olds I met with ten and twenty years ago are dropping their Term life plans as the premiums become too costly because of their current age and are now facing retirement without any life insurance.

Because of our lengthening life expectancy and higher cost-of-living, Term insurance plans are a great tool to fill the gap from the early working years when the budget is so tight little else can be afforded. But by combining some type of cash value plan, whether Traditional or Variable with Term coverage, a more stable financial plan will be in place and provide the needed protection for many years beyond the ability of Term coverage alone.

Life insurance when designed correctly should replace lost income and provide the ability for the beneficiary to maintain their current lifestyle. The lost income is not always a job, as it could also be a pension, or Social Security. It is also supposed to provide the lump sum of cash needed for final expenses and to pay off remaining debts. If it is not still in place when you are past the age of 60, then one of the major purposes of life insurance is not being met. If you need assistance
reviewing your policies, visit with us or any qualified agent in our area.

Would you like a response to a financial question? Send your question to Doug Horn, 115 W. Broadway, Maryville TN 37801. Be sure to mark your envelope Money Matters.

Doug Horn, CFP, is an area financial planner with more than 21 years financial experience and founder of Quality Financial Concepts, located in downtown Maryville on Broadway.

Doug Horn, CFP, Registered Investment Advisor in Tennessee and Texas and Registered Principal, Branch Office of and Securities offered through CUE Financial, Member NASD, SIPC.

© 2006 All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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