It can be a good, cheap solution for many clients.
By Bill Boersma
A younger attorney asked me some time ago to get some term numbers for her clients. When she reviewed the numbers her question was “Is this premium monthly or annual?” When I told her it was annual, her next comment was “Could you quote some term for me and my husband?”
Statistic shows most people are meaningfully underinsured. Sure, this is easy to say when it’s someone else’s money you are spending, however, I don’t think most people understand just how cheap term insurance is. Yes, some people can’t qualify for it, and some people just don’t have any money, but that isn’t the case in most situations.
As an insurance guy, I have millions of term. (Yes, I have some permanent as well for charitable and estate tax planning, but it’s mostly term.) I acquired most of it when I was relatively young, and it’s all at the preferred best rates and it was ridiculously inexpensive. I have a few million on my wife, who doesn’t have an earned income, because I knew what it would take to raise the kids and keep a house if she was gone. I never understand it when there is a hesitation to have insurance on a non-income producing spouse. Who do you think is going to be doing all that stuff?
Here’s my business succession plan: a couple million of term for my employees and the freedom to decide if they want to make a run of it or cash the check, lock the doors and go their merry way.
Term on Top of Installment Buy-Outs
I’ve recommended to many business owners with installment buy-outs at death to buy term insurance anyway to go straight to the spouse. If the successive management runs the company into the ground, there’s no worry. In a worst case scenario, the spouse gets everything, and in a best case scenario, the spouse gets twice everything. That’s just comforting. After all, a 45-year-old shareholder could get a 20-year policy for a premium so low the 20 years of cumulative premiums is equal to only two months of a 120-month buy-out. I certainly wouldn’t risk it.
Underinsured
Let’s say I have a buddy making $350,000. After tax and retirement contributions, you know the family is living off of at least $200,000. He has a $1 million term policy and tells me his wife can pay off the mortgage, and she and the kids will be all set. What a moron! She doesn’t work outside the home so where’s the money for food, property taxes, clothes, entertainment, schooling, retirement and so on going to come from? They’ll burn through the checking account and the 401(k) in a handful of years at best.
Everyone wants to know a rule of thumb, so I’ll share my simple one. A million bucks isn’t a million bucks, it’s $50,000 of annual income. Depending on what stage of the market and interest rate cycle we’re in, some will say it’s too aggressive and others say it’s conservative, but I’m not changing my numbers. If my buddy kicks the bucket, his family is still going to need/want the $200,000. He needs $4 million of insurance less how much income producing assets are currently there—at least! What about inflation, what about college education, what about income taxes on earnings and what about saving for retirement, etc.?
He could get a million or two for a thousand bucks. Really! If that’s not worth it, then we have bigger issues to deal with.
Money Losing Proposition?
The problem with selling term insurance is that it’s so cheap, at least for young people, agents can’t make any money selling it. It’s true. It’s hardly worth the time to take an application and have it underwritten. It’s often a money-losing proposition. That’s why the new agents in the industry are taught to sell permanent insurance to newlyweds and new parents and anyone else who will buy it. It’s more profitable for the agents and the carriers, although it often does a disservice to these young people when what they really need is a boatload of cheap term and not spend the same money on a fraction of the death benefit for cash value insurance.
Some won’t like to hear me say it, but I’ll go as far as stating that it’s professional malpractice and an ethical betrayal if an agent sells a $100,000 or $250,000 whole life policy to a young couple starting out rather than a couple million of term, given the assumption there’s a finite amount of dollars to allocate to premiums.
Good for Client’s Kids/Grandkids
I urge my clients with kids and/or grandkids in their 20s and 30s to help buy the greatest amount of term life insurance we can talk an underwriter into issuing on the kids. It’s not that they need that much right now but the insurance companies are practically giving it away, and they’ll likely need it later, and the kids are probably very healthy now. For mom and dad, who are paying $10,000, $25,000 $100,000 or more annually on their own premiums, the few hundred or few thousand to get a few million on the kids is nothing. It’s almost silly not to. It’s like checking out at a home improvement warehouse with $1,000 of materials in your cart and grabbing a $5 knife or flashlight. Do you have to have it? Of course not. Does the cost really make a difference? No. Might you be very happy you have it some time in the future? Yes. Besides, a certain percentage of these kids aren’t going to be able to obtain insurance on a favorable basis, or even at all, if they wait until they need it. I see it. It might not even be about their health. The kids may be locked out of the best classes because a parent was diagnosed with a cardiac or cancer issue. Yes, that’s the way it works.
So, what do these numbers look like? Here is a chart for $1 million of coverage assuming a reasonably healthy person, but not the preferred best class. These are the lowest numbers from an online term insurance calculator.
See what I mean? Especially for the young people. Also, as I’ve written about before, this is a much better deal than most of the association term to be found in the market. It’s way better than any mortgage or credit coverage you’ll be marketed.
It’s what I did for my kids. They’ll be paying the same few hundred bucks a year for $500,000 of 30 year term when they’re 50 years old. If life develops in a way that this is all the insurance they can get, then they have at least that much, and if conversion language is taken into consideration at the point of purchase, they can have that insurance forever.
Politics & Tax Law
We know that many people will be grasping at straws to not buy life insurance they think they don’t have to. With the recent election, many are assuming the estate tax exemption will end up higher than it might have been otherwise, so they don’t have to buy the insurance. Frankly, I think this is a big mistake. Does anyone really think that the estate tax laws we have in place now, or over the next few years, will be the same ones in force 20, 30 or 40 years from now? You really want to bet a substantive portion of your life’s work on what party is in power and the what the estate exemption is 32 years from now when you die?
For a 55-year-old guy or couple who’s putting off a $10,000,000 permanent insurance purchase, that might cost them over a hundred grand a year, how about $15,000 to $20,000/year for a $10 million term purchase to hedge his bets? Buy $10 million on his spouse as well to be able to convert to $10 million or $20 million of survivor coverage if need be down the road.
To sound like an NPR fundraiser, “For the cost of a cup of coffee a day you can have a million or two of insurance to take care of your loved ones if something happens to you.” Again, except for those with health issues that prevent insurability, I find it frustrating to hear about the fundraisers for a young family who lost a breadwinner. Three hundred dollars gets you a million of coverage on a 35-year old. How many times did that same person spend $300 a year on beer, cable, phone upgrade, eating out, new purse or pair of shoes and fuel for the bass boat or snowmobile? You get the picture.
More disconcertingly, the U.S. government supports irresponsibility. With every national tragedy of suitable proportions, a compensation fund is formed to distribute benefits to the victims. Did you know that when a value is put on someone’s life, Congress mandates a reduction in that number by how much life insurance the individual had? Per their belief, be responsible and take care of yourself and your family, and we’ll walk away from you; be irresponsible and we’ll rush in to take care of you.
This isn’t something you should overthink. Don’t underrate term insurance. For many it’s been a fundamental underpinning of financial security for generations for a reason.
Bill Boersma is the founder, owner and president of OC Consulting Group, a fee-based life insurance consulting, audit and management practice located in Grand Rapids, MI. For more information, visit www.OC-LIC.com or call 616-456-1000 or email bill@oc-lic.com.
