Insure against death

Note: This post is sponsored by Lawrence Keller, CFP®, CLU®, ChFC®, RHU®, LUTCF,  an independent agent for several insurance companies. He has earned his reputation as the “go-to” agent for life and disability insurance for doctors and other high–income professionals.  If you wish to contact him you can call (516) 677-6211 or email [email protected]

Do you have life insurance? You need to unless you'll never have dependents – children, a spouse, parents perhaps. One of my mantras is to insure yourself against the top 4 financial catastrophes – death, disability, divorce, and liability.

There's a lot of confusion as to what life insurance product to buy, how much to buy, and for how long. For the overwhelming majority, term life insurance is the right product. Term life insurance is a product where you buy a certain amount for a certain amount of time (or term). If you die during the term, your beneficiaries receive the amount purchased tax-free. Typical terms are 10, 20 or 30 years.

You can also “ladder” policies meaning that you stack multiple policies with varying terms. For example, you purchase three policies: $1 million x 10 years, $1 million x 20 years, and $1 million x 30 years.   If you die in the first 10 years, your beneficiaries receive $3 million, if you die in the 2nd 10 years they get $2 million(as the $1 million x 10 years policy has expired), and if you die in the 3rd 10 years, they get $1 million.

You could just buy one $3 million x 30 year term but this is a lot more expensive and likely not necessary. The reason to decrease the payout amount over time is because your wealth will build and you will have enough to self-insure (retirement accounts, cash savings, debt elimination). Many factors determine your rate, here are a few:

• Gender
• Age
• Health – personal and family medical history (cardiac disease, cancer)
• Smoking status
• Activities – rock-climbing, skydiving enthusiast, etc

How to buy term life insurance:

1. Determine how much you need and for how long The amount you need depends on what you want the life insurance money to be used for. If you die, you want enough money to cover funeral costs, any debts (mortgage, student loans, etc.), kids' childcare and college costs, or any other dependents that rely on your income. If you're married, do not underestimate the toll your death will take on your partner and other dependents; they may need to take some time off and get things in order. Wouldn't you want to give your partner (and kids) the time and freedom to do that? Also keep in mind that inflation will eat away at the amount as well. A good starting point is 7-10x of your income. For those who are divorced and have to cover multiple family interests please consult any divorce decree requirements and factor those requirements in as well. A sample calculation for someone who makes $250K:

• $500K mortgage
• 2 kids, $250K each for college
• Funeral costs $10K
• Income loss for remaining partner: depends if they work or not. Even if they work, their lifestyle and budget likely included your income too. So let's say you'll want $100K per year to reflect that (remember this money is tax-free). So this comes out to $1 million for every 10 year term.

This comes out to just over 2 million for a 10 year term. This amount may decrease as you build up retirement and other savings, 529 accounts, etc. Using the 7-10x rule of thumb this amount falls in that range ($1.75 to 2.5 million). A stay at home spouse needs to be insured as well. You may have heard that life insurance is only needed for those that make income. But a stay at home spouse is providing childcare and likely other household duties. You'll want to account for how much childcare would cost in the event of their death.

2. Get an idea of how much it will cost on www.term4sale.com You'll see that the price of the policy will differ widely depending on whether you are female or male, the term amount, the dollar amount, and health class.

3. Talk to a broker or agent You want to work with an independent agent or broker vs. an agent that only represents one company.  If you are working with a financial advisor it is wise to reach out and receive their input as well.

4. Seriously consider purchasing disability insurance if you don't have it already to save you another work-up. You will likely need medical underwriting to determine your health class. This involves blood work and a physical exam. These can also be used for disability insurance so that you don't need to repeat this again if you apply for it within a year (generally speaking).

Other caveats:

• If you're a woman, I strongly recommend purchasing some as early as possible if you know you'll want children. If you wait until you're pregnant you may get dinged with a rider that any pregnancy related death won't be covered (same applies for disability insurance), or you may develop a pregnancy related condition such as gestational diabetes that will ding your health rating from the top class to the 3rd or 4th class. This will result in a significant increase of your annual premium. For example a 35 year old who applies for a $2 million x 30 year term would go from an annual premium of $1,265 to $2,105 if she develops gestational diabetes (numbers for Prudential).
• Same advice applies to men since life insurance premiums are higher for men. This stuff is already cheap and cheaper the younger and healthier you are. You'll never be as young and healthier than now.
• Banner (William Penn in NY) offers laddering within one policy vs. buying multiple policies to form a ladder. This saves you about $60 per policy bought.
• You may hear of a “Waiver of Premium Rider”. This waives the premium on a term life insurance policy if the insured is disabled. Unless the insured plans on converting their term policy to Whole Life (and most insureds won't), one should not consider this rider as it can, generally, add 10-25% to the cost of the annual premium. I would recommend just getting enough disability insurance instead.

I've purchased 2 policies: $1 million x 20 year term, bought at age 38 (Banner, $496/year) with preferred health plus rating (the highest health rating). I also have $1 million x 15 year term bought at age 39 (William Penn, $382/year). And yes, I bought both from Lawrence Keller.