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Now Is the Time to Pick Up Low-Cost Life
Insurance
If you need life insurance, now may be the time to buy it.
Insurance premiums are expected to drop 4 percent this year,
following a 5 percent decline last year, according to the
Insurance Information Institute, New York. In fact, premiums are
less than half of what they were a decade ago.
There are two basic types of life insurance policies that
have lowered their premiums: term and permanent.
Term insurance is basic coverage. You pay a premium and just
get life insurance for a specific period, typically from 1 to 20
years. Upon the renewal of a term insurance policy, though,
you'll pay a higher premium because you're older.
Permanent insurance, on the other hand, provides both
insurance coverage and a savings account, known as the
"cash value." Cash value policies include whole life,
universal life, variable whole life, and variable universal
life. Cash value insurance is permanent protection. You lock
into a premium when you purchase the contract. Universal
policies let you make flexible premium payments.
Why are life insurance rates dropping? People are living
longer. The longer you live, the lower your insurance premiums.
Life insurance rates are dropping because death rates for the 25
to 44 age group — the primary purchasers of life insurance —
have
decreased significantly over the past 10 years, according to
Weisbart. In 1996, the death rate per 100,000 for the 25-to-44
year-old age group was 177.8. By 2004, it had dropped to 161.8,
based on National Vital Statistics Reports preliminary data.
That represents nearly a 10 percent drop in the death rate in
less than a decade for the prime insurance-buying ages.
The drop in insurance rates can represent a substantial
savings. The annual premium for a 40-year-old male nonsmoker
buying a $500,000, 20-year level term life insurance policy in
2007 would run $615 if he qualifies as a "standard"
risk and $340 if he meets the more stringent requirements of a
"preferred" risk. Rates for women, younger people and
for larger amounts of insurance would be lower.
Premium rates for traditional whole life, universal life, and
variable universal life insurance also are lower. Today, someone
age 35 would pay about $8 per $1,000 of coverage for permanent
protection. Ten years ago it was more like $12 per $1,000 of
coverage.
With rates lower than they ever have been, parents might
reassess the amount of life insurance they carry, and consider
purchasing more. For example, it takes, calculated in the most
simplistic of ways, a $500,000 death benefit to pay a widow
$2,500 a month for 17 years. Yet, in 2004, according to LIMRA
International, Hartford, Conn., the average 25 year-old to 34
year-old adult with life insurance had only $145,000; the
average 35 to 44 year-old adult had only $323,000 of life
insurance.
So what should you do if you're sitting on a higher rate term
insurance or cash value policy? Have an experienced life
insurance agent conduct an insurance needs analysis to determine
how much coverage you need. On average, you need about five to
eight times your wages to be adequately protected.
Most life insurance companies charge lower rates for larger
amounts of insurance. So buying one larger policy rather than
keeping a smaller one and starting a second policy should
further lower your premium. Rates often drop at the $250,000,
$500,000, and $1 million levels. Do note on the application that
you plan to replace an existing policy. And, don't drop the
existing policy until the new one is in place.
The drawbacks: If your age, occupation or health has changed,
you may not be able to get lower premiums from another insurer.
You can check term insurance rates at web sites such
as www.accuqote.com
or www.selectquote.com.
There are more factors to consider when switching a whole
life, universal or universal variable insurance policy. In
addition, consider:
- Although you can do a
1035 tax-free exchange to move the cash value from your old
policy to a new policy, you'll pay commissions and other
insurance costs on the new policy. This can mean more than
50 percent of your premium in the first year and other
commissions on the cash value that is moved to the new
company.
- If the total of all
prior premiums is less than the cash value in the policy you
are replacing, you will owe income taxes on the difference.
A 1035 tax-free exchange should be considered in this
situation.
- Usually, if a cash
value policy has been in force for 7 to 10 years, with a
quality carrier and you are not changing the type of
underlying investment from a fixed portfolio to a variable
portfolio, it is unwise to make a change.
- Life insurance
policies are incontestable after they have been in force for
two years regardless of any errors or misstatements on the
initial application. Replacing an existing policy with a new
policy will start the incontestability period over again.
- Any policy loans on
your old policy will have to be repaid.
Tip: Always check the financial strength of the insurance
company you are considering. The strongest companies are rated
A++ and A+ by A.M. Best and AAA by Standard & Poor's.
March 2007 — This column is produced by the Financial
Planning Association, the membership organization for the
financial planning community, and is provided by Don McCarty of
Financial Decision Partners, a local member of the FPA.
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