You’re Not Too Young for Life Insurance

On December 21, 1988, 259 people boarded Pan American Flight #103 for a routine transatlantic flight from London to New York City. When a terrorist’s bomb exploded over Scotland everyone aboard perished. One of those passengers was insured by Askin’s term life policy and it is, to date, one of the biggest claims ever paid by the company.

Being in the life insurance business for almost thirty years, I have paid a number of claims, but none stand out more than two I paid as a result of the September 11 attack. Both the insureds and their widows were in their thirties, and one widow was pregnant. Tragic stories like these dramatically teach us that even young people need to be prepared when it comes to buying life insurance.

Coverage Factors
Income replacement is typically the primary factor in determining the coverage amount. The death benefit is calculated as a multiple of the insured’s income, which, when invested conservatively, would replace that income. However, several other factors should be considered.

For example, some people may have excessive debt, such as college loans, or are helping support elderly parents. Others may have additional sources of income from investments or family members who provide annual gifts.

Look at your entire financial situation to arrive at an amount that would allow you to continue on the same path as if you were still alive and earning income. Consider any other financial burdens, in addition to income loss that a sudden death would bring.

Today, where many families survive on two incomes, both people really need coverage. Even for those households that have only one wage earner, never underestimate the replacement costs for a traditional stay-at-home mom.

Determine a time frame for your needs as some of them will diminish over time. This will aid in choosing the type of coverage you purchase. Also, this is especially true for those who are in the “just” time of life: just starting their careers, just starting a family and just having children.

Once you have arrived at the necessary death benefit and time frame you can then consider coverage options. There are basically two types of policies: term and permanent life insurance.

Policy Types
Term Insurance provides protection for a specified period of time. It pays a death benefit only if you die during the term covered by the policy; which is generally 10, 20 or 30 years.

Some term policies offer a very valuable “conversion” option. This allows you to convert your life insurance policy to permanent coverage beyond the end of the originally specified time period without evidence of insurability. For young people with large insurance needs and other current economic obligations, term life insurance usually provides the most cost effective coverage. The key advantages of term insurance are:

• Initial premiums are considerably lower than permanent coverage.
• Lower premiums allow insureds to buy higher levels of coverage at a younger age when the need for protection against lost income is often the greatest.
• With a conversion option you can convert a term policy to permanent coverage as your needs change.
• It allows you to pick specified periods of coverage from 10 to 30 years.

• Guarantee protection as long as the premium is paid.
• Premiums can be fixed or flexible so that a policy can meet specific needs.
• You can borrow or surrender from the cash value as well as cash in the policy.
• It may be appropriate for certain circumstances, such as estate or business continuation planning.

Permanent coverage is more expensive than term policies, and the premium-to-death-benefit ratio may prohibit an insured from buying the adequate death benefit needed to protect their families.

Term Policy Buying Tips
Buy a bit more coverage than you think you need and for a little longer term. Most people don’t get as wealthy and retire their debt as quickly as they had hoped. If your child gets a college scholarship or you win the lottery, you can always drop some coverage. Buying more at an older age is expensive and you may not be insurable.

Make sure that your policy is convertible, and be certain that you know how many years your initial premium is guaranteed for.

You never know your exact premium until you apply. Agents and websites do not issue policies, insurance companies do – and only after going through the underwriting process. Most quotes are nothing more than non-guaranteed guesses.

Be careful with beneficiary designations. Having children as contingent beneficiaries could have your child using his or her college fund for a new Corvette if your primary beneficiary dies with you in an accident.

Never rely on your job for all of your life insurance needs. People change jobs frequently, and plans change just as often. Since nobody takes an exam for group term, insurance companies price the coverage on adverse selection. Unless heavily subsidized by the employer, coverage can usually be purchased cheaper on your own.

Be comfortable with your agent and the company he or she represents. An experienced and professional presentation of your application to the carrier is critical to your coverage.

Reprinted from the New Jersey Society of Certified Public Accountants enewsletter, E-YoungCPA. For more information, visit www.njscpa.org/youngcpas.