Teach me about life insurance

Robert LarsonContributor - November 26, 2022

Advice

I don’t feel any immediate need to get life insurance because I am relatively healthy, but accidents happen. In addition, with things costing more lately than they have been in previous years, I am seeing how hard keeping up with the bills and cost of living would be for my wife if I were to pass away.

I know nothing about life insurance, but might want to consider it. Can you all tell me if you have it, do you know of anyone who has had to cash it in, how do you shop for it, what kinds are there, things like that.

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I have life insurance, accidental death and dismemberment insurance, short term disability insurance, and long term disability insurance. These are all essentially insurance against no longer being able to earn income to support my family. If I die, I can still take care of my wife financially to help her through that difficult transition. If I’m alive but unable to work, we’ll continue to receive a large portion of my previous salary.

 

My coworker became pregnant and needed to miss several months of work. I don’t know how she dealt with that, but she shared that she very much regretted not having disability insurance.

After that, she purchased disability insurance in case she were ever unable to work again. Years later, she had cancer and needed to miss work a lot for treatments. This time it was much easier to take the time she needed. As long as a doctor signs off that she needs to miss work for medical reasons, disability allows her to take that time and still have income.

Short term disability helps with the first 6 months that you’re unable to work. Long term disability does the same for month 7 and later. It’s worth getting both. My coworker only used the short term.

I hope you’ll never be in the situation that you need disability insurance. But if you ever are in that situation, the insurance helps a lot both with finances and with stress reduction.

The same coworker also has life insurance. She’ll fight the cancer as long as she can. If/when she can’t fight it any longer, she can still ensure that her child is taken care of.

 

Previous thread on estate planning that you might find helpful:

https://theprepared.com/forum/thread/it-cant-be-said-too-many-times-do-your-estate-planning/

 

Hi, Robert. I worked at the home office of a life insurance company for six years in the 1980’s. I took classes for a professional certification back then. I feel comfortable that I understand the basics, but I’ve been out of the field for a long time.

I have term life insurance (no cash value if you were to surrender it). It has had a very low, fixed premium for 19 years. After year 20, the premiums skyrocket. The theory behind the pricing was that when people presumably had dependents, the premium would be low, and when they were at a different place in life, they could afford the premium increase.

I am seriously considering trying to cut the face value of the policy in half since I don’t have dependents. I still want to have money to cover my final expenses, and I’d like to leave some for beneficiaries. I need to investigate, but I doubt that I could “convert” the term policy to another type (whole life) for an affordable premium.  I wouldn’t have to prove my insurability if I convert it. 

Basics of life insurance — The younger you are when you take it out, the less expensive it will be.

I wonder how the life insurance actuaries are viewing premiums in the age of covid? Folks are dying younger. I wonder how that’s going to be reflected in premiums.

Best wishes to you.

 

My husband and I are both in our 40s and have term life policies, but we’re also starting to look into long-term care insurance. A lot of folks don’t realize that Medicare only covers a few weeks of skilled nursing care, so if you need to be in a nursing home indefinitely and don’t qualify for Medicaid, you need private long-term care insurance or have to pay out of pocket. The private insurance option is much harder to get (and may be impossible) if you wait until you are older. A family member of ours is starting to show signs of dementia and will likely need to go to a nursing home eventually, which prompted us to look into it. 

 

Long-term care insurance is really a challenge these days. The industry underestimated how many people would claim long term care benefits.  As a result, many companies have gotten out of the business and the few that remain offer policies that are unaffordable to most people.  I was fortunate enough to get long-term care coverage earlier in my life.  Most people laughed at me for getting it so young.  They are not laughing now.

 

Here’s an article that might help you Robert: https://www.ramseysolutions.com/insurance/types-of-life-insurance

 

My wife spent years in the life insurance business so I have a bit of knowledge….a very small bit. She says avoid “term life insurance” unless that’s all you can afford. It’s like throwing money away unless you die. Get whole life. 

 

Joshua Sheats, who hosts Radical Personal Finance, did a life insurance series a number of years ago. Joshua used to sell life insurance. The episodes are technical but accessible. (Although the show has kind of declined in quality in recent years, those episodes are excellent.)

One note on your comment about being healthy: companies are screening people now. The only way to purchase cheap health insurance is to purchase before you are unhealthy or need it.

My dad died of a terminal disease three years before his term life insurance policy expired, and it was such a relief for my mom. That pushed me to buy some to cover my life.

 

Thank you everyone for your wise counsel and advice. While I’m shopping and researching this topic further, I will keep an eye on this post and everything you have said.

 

I am a bit late to this thread but wanted to echo some of the experiences below. I have short-term disability insurance, long-term disability insurance, long-term care insurance, and term life insurance.  I have had to use the short-term disability twice and was SO glad I had it. Both times were due to completely unforeseeable, unpreventable, seemingly minor accidents that left me unable to do my job for a short period of time.  Having the insurance meant I could invest all of my energy recovering vs. worrying about how we were going to pay the bills. A dear family member did not have disability insurance, and got cancer.  Though she did eventually recover and is now in full remission, she had to work through her chemotherapy and radiation treatments which was so sad.  It was very stressful for her and her family.  So while you asked about life insurance, please consider the full insurance picture (the thread someone else linked to with Dave Ramsey is very informative. I don’t love all things Dave Ramsey, but his insurance advice is spot on).

As for life insurance, I respectfully disagree with those who claim whole is better than term.  Insurance has never been intended for getting your money back! If I never have to use my car insurance, or homeowner’s insurance, or disability insurance, I am happy.  The point of life insurance is to make things easier for those you leave behind. Period.  And term insurance does that most cost-effectively.  I took out my policy in my early twenties when we bought our first house, as I knew my husband couldn’t afford the mortgage if I croaked. I got just enough to make his transition easier – life insurance isn’t about gaming the system and trying to hit the lottery. As I’ve gotten older the company has tried to persuade me to convert to whole life, but we are at the point now where my husband’s career is sufficiently stable, and our debts are sufficiently low, that if I croaked he would be fine.  So we don’t even really need the insurance any more.  I want to cancel it but since the rates are super low we’re keeping it for now.  They are low only because I took it out in my healthy early twenties.

My advice is to get the highest amount you can get without a health evaluation.  I had a good friend who got turned down for insurance because she had both high cholesterol and high blood pressure.  Sounds like no big deal, but once you get turned down for one insurance it is very hard, if not impossible, to get insurance anywhere else (there is always a question on the application about whether you’ve ever been turned down for insurance).  Meaning that she now cannot get disability, long-term care, or life insurance (believe me, she has tried).  

 

“once you get turned down for one insurance it is very hard, if not impossible, to get insurance anywhere else”

I hadn’t thought of that issue and it sounds like an important minefield to be aware of.

 

Yes, it is a minefield indeed. I even had a doctor once who, ever-so-carefully, suggested that if I were to be tested for a certain disorder that I should do so elsewhere, pay cash and leave no paper trail so that if the test results were not to my liking I could pretend they never happened. Because once a diagnosis is in your insurance record it will haunt you forever (at least in the United States).  He said that if the tests were positive that I would never be able to get disability or life insurance.  (Luckily the tests were fine, and I did elect to do them on the record after extensive conversations with my family. But I appreciated the warning).  

 

That’s a good way to avoid having insurance catch wind of your condition, but really sad we have to do things like that.

Thank you for this great tip! I am much better prepared now when trying to get a quote.

 

I am not an insurance specialist.  However, there are a few key points I would like to make about life insurance.

• Life insurance is not needed if there is no income to replace.  One of the main reasons to have life insurance is to replace income.  If there is no income to replace, you may not need insurance.
• The amount of insurance needed is usually more than people think.  For example, $1,000,000 worth of life insurance sounds like a lot.  However, if you use the 4% rule, you should only spend $40,000 per year.  This may be adequate for some people, but I know it would not be enough for me. Think of it like an escrow account whose investments need to generate enough income to last your lifetime.