Oct 072011

Should you buy life insurance now or put it off until later?

One of the ingredients in setting life insurance premiums is interest rates.  Insurance companies invest the premiums they receive and use the interest to help pay expenses.  When interest rates are very low, there is less investment income so insurance companies look elsewhere for sources to pay expenses.

Will the “elsewhere” be higher life insurance premiums?

Garry Marr writes in The Financial Post it may be to your advantage to not delay buying life insurance.

You probably don’t want to hear this, but poor investment returns are delivering a new casualty – rising insurance premiums.

Rates on universal life policies are set to increase in the coming weeks on top of increases in November 2010, as insurance companies attempt to better match their funding commitments.

“We led the first round [of increases last year] and we are leading this round,” said Paul Smith, vice-president of marketing and product development at Manulife Financial about the bump due Oct. 15, which will see premiums rise as much as 12%.

“Interest rates have fallen. When we did our price change last year, we looked at it historically. The way we figure that price out is we discount it at what we think we can invest the premiums at.”

It was less than a year ago that Manulife raised premiums about 10% on average for universal policies. The younger you are, the more the increases will hit you because a longer commitment means increased risks for insurance companies. Premiums for 25-year-old males have climbed 40% in a year, says Mr. Smith. “You got a deal,” he says about people who locked in last year. The last thing you want to do is let that policy lapse.

A few years ago companies began adding long term guarantees to universal life policies.  Many policies now guarantee premiums won’t be increased even if you live to age 120.

The issue for insurance companies has been how to fund the guaranteed payout offered in universal policies. The policies, which now make up about 40% of the market, became popular 15 years ago when interest rates were above 8%

Yet as interest rates fell, premiums didn’t follow suit. The insurance companies have been holding off raising premiums based on a sentiment that rates were going to rise.

“It’s all come to head in the last year, but we all believe now we are in for a longer period of low interest rates,” Mr. Smith.

“One of the other issues is you can’t even buy bonds to match these liabilities. Think of a 30-year-old. They are going to live to 85. You can’t buy a 55-year bond.”

So what does this all mean?  Can you get a bargain on universal life right now?

Certified financial planner Mark Halpern, who runs illnessprotection.com, said there is a window today that is making a universal policy a better bet than a term policy.

“Right now, a 50-year-old male could acquire $1,000,000 of universal life insurance for a guaranteed premium of $10,500 per year. With a life expectancy of 82, that individual would have to earn an after-tax return of 6% for 32 years to accumulate $1,000,000 after tax. That is an impossible return on a guaranteed basis,” says Mr. Halpern.

He adds it’s not just Manulife.

“I can guarantee all will follow suit,” Mr. Halpern says. “My estimation is there will never be as good a time as there is now to buy insurance. Certainly permanent insurance.”

If you need additional life insurance, now may  be the right time to purchase.  Evaluate your needs and compare prices before you buy.

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 October 7, 2011  Posted by at 8:51 pm Whole Life Insurance Tagged with:
Oct 032011

Over the past several years term insurance became the insurance buyer’s favorite.  From the A.L. Williams organization to Dave Ramsey we were sold on buy term and invest the difference.  Permanent insurance or whole life was swept into the trash can.

In the online publication LifeHealthPro, Gilbert Chapman asks if whole life insurance would have been appropriate for Ward and June Cleaver as they hit retirement.  Take a trip down memory lane to discover if whole life can help you.

To fully appreciate why whole life insurance is more important to retirees today than it was 50 years ago, this article is going to contrast the lives of two couples: one that existed in 1960, another in 2010.

Our first couple is represented by Ward and June Cleaver of the television show “Leave it to Beaver.” As you may remember, the Cleavers represented a fairly affluent middle-class family in the 1960s. Ward appeared to be a successful executive, while June spent her days as a housewife.

Now let’s move ahead a few years. Their sons, Wally and Beaver, are out of college, the mortgage on the house is liquidated, and Ward is looking forward to retirement in 1982. His firm has a generous defined benefit retirement plan, and he will have a Social Security check in the mailbox monthly, as well as the income from an investment portfolio created after the mortgage was burnt and the boys had finished college.
June, of course, would receive little — if any — Social Security, as she may only have been employed part time, or perhaps never was a part of the workforce.

As Ward sits there in 1970, pondering his future years, he concludes he will be able to live pretty well after retirement. Further, Ward decides that he will eventually be able to drop that term life insurance policy he has had for years, because he will no longer have future earned income to protect.

But what happens to June if Ward dies shortly after he retires? Will she have enough money to live out her life comfortably? Yes, Ward took the pension option that will keep on paying after either one of them dies, and June will still receive his Social Security checks. Likewise, the investment portfolio will continue to generate income.

There is no doubt life was good to Ward and June, but what would happen if we moved ahead 50 years, and we made just one change — in June’s career choice?

The modern Cleavers
Let’s assume that the modern Ward and June have worked for their entire adult lives, and both have earned about the same income. In this example, each will collect $20,000 from Social Security, and they expect to liquidate $20,000 annually from their 401(k) portfolio. Their gross income would therefore be about $60,000 annually during their remaining years together.

But what happens today if Ward dies at age 70 and June lives to 90? Ward’s Social Security benefit would disappear, and June would have to make do on $40,000 annually. Does anyone really believe June’s expenses will go down by 33%?

In essence, even though Ward was retired, he was still “earning” $20,000 per year from Social Security just by being alive.

The proceeds from a whole life insurance policy on Ward could have protected June’s financial future. Let’s say that Ward and June had converted their $500,000 term policies to $250,000 whole life policies when the modern editions of Wally and Beaver had finished college. That $250,000 (even with today’s low annuity rates) would generate at least $20,000 annually from most any annuity for either survivor’s entire life.

Life imitating art
Now, to close, with a real life event that offers credence to this concept. Hugh Beaumont, the actor who played Ward Cleaver, was born in 1909, and died at age 73, in 1982. Barbara Billingsley (June Cleaver) was born in 1915, and died at age 94 in 2006, some 24 years after her television husband did.

I wonder if the 1950s TV insurance agent, Jim Anderson (played by actor Robert Young) of “Father Knows Best” fame, ever talked to the Cleavers about converting Ward’s term insurance policy to a whole life insurance policy. Then, had Ward’s defined pension benefit evaporated when his old company’s new management team misappropriated the funding, June would have still lived a financially secure life. Just a thought.

Maybe the death of whole life was announced prematurely.  Check with your insurance advisor to see if whole life insurance is right for your family.


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 October 3, 2011  Posted by at 11:48 pm Whole Life Insurance Tagged with: