SB 147 will allow up to $100,000 of life insurance proceeds to be exempt from the insured’s creditors.  This law will go into effect on September 1, 2010.  Until then, the current cap of $50,000 will apply.  26 states have an unlimited exemption for the protection of life insurance settlements from an insured’s creditors.  The new Colorado law will bring the state a little closer to the protections offered to beneficiaries in other states, although $100,000 still isn’t really a lot of money in terms of protecting a family’s financial future if the primary earner dies.

The Notwithstanding Blog recently published an excellent article detailing the reasons why the tiny percentage of fast food stocks owned by major health and life insurance carriers is insignificant when compared with their overall portfolios, and also not detrimental to their policyholders.  In fact, if stock market profits are used to help keep premiums lower than they would otherwise be, policyholders are financially better off than they would be if the insurance companies were invested in a less profitable stock.

Would we be better off without fast food restaurants, or with far fewer of them?  Probably.  Would we be healthier and our health and life insurance premiums be lower?  Maybe, although it’s reasonable to expect that people might find other sources for junk food.  We pay insurance companies to protect our assets and our financial futures (and those of our loved ones) in the event of an illness, injury, or death.  Their chief responsibility to us as policyholders is to remain financially solvent and profitable in order to be able to pay claims as they arise.  Investing in profitable stocks is a good way to go about that, and the fact that some of those stocks are in fast food companies is irrelevant.

In addition, I’m curious as to how many of the people who are outraged by this issue own mutual funds or index funds that hold some stock in fast food companies.  McDonalds is part of the Dow and the S&P 500, so it’s likely included in a lot of basic funds.

Certified financial planner Carl Richards had a great article on the New York Times blog last month, about why life insurance shouldn’t be treated as an investment.  The napkin drawing is chuckle-worthy, but it also makes a really good point:  for most people, it’s a better idea to keep investing and life insurance as separate entities.  There are exceptions, such as people who need to generate cash upon their death to pay estate taxes on assets like real estate or a business that they would like to pass to their heirs without selling.  For situations like that, the financial obligation won’t diminish over time and the life insurance policy needs to be permanent.  But for most people, the need for life insurance does indeed diminish over time as children finish college and mortgages get paid off and net worth grows.  For many people, the need for life insurance after retirement is low, as there is no longer an earned income that would need to be replaced.

For people who still have many years of work ahead of them – and many years of financial obligations – now is a great time to look into securing life insurance.  A term life insurance policy will allow you to lock in the premium based on your current age, and is a great way to protect your family’s financial future without taking financial risks.

Roy Bubbs, President and CEO of Hooper Holmes, noted that life insurance carriers spend an average of $500 to underwrite an application, and he believes that his company’s product that reduce that amount by half.  My guess would be that it will also speed up the underwriting process, much as the electronic application process for health insurance policies reduced underwriting times for some policies from weeks to days over the last decade.

The iParamed e-Exam technology will come out in four stages over the course of the next several months, and will be fully operational by the end of 2010.  Nine life insurance companies (hopefully including some that we work with here in Colorado) will be using the technology initially, and my guess is that the rest will soon follow, either with the Hooper Holmes product or with a similar electronic system.

1.  It might be more coverage than you need… or at least coverage for longer than you need.  Because permanent life insurance is so much more expensive than term life insurance, people might get a lower face value than they really need, but end up with life insurance long after their children are grown and the house is paid off.  It usually makes more sense to purchase a less expensive, higher face value term policy, which will truly provide financial protection to your family while they need it – ie, while children are young, college still has to be funded, and payments are still being made on the house.

2.  It may not be your best investment.  The idea with permanent life insurance is that it provides a death benefit, but also builds cash value via investments.  But for most people, it makes more sense to purchase insurance separately from investments.  It’s hard to tell where your money is being invested in a permanent life insurance policy.

3.  But in rare cases, it’s just the ticket.  I would say that these are very rare cases, but they do happen.

4.  The right flavor makes all the difference.  Deciding among the three types of permanent life insurance policies (universal, variable, and whole) will likely require extensive research and/or a meeting with a financial advisor.

5.  Dumping a policy will cost you.  It takes many years for the cash value in permanent life insurance policies to build up to a significant amount of money.  If you cancel a term policy early, you’ve only paid for the life insurance protection you got during the years you had the policy.  But if you cancel a permanent policy in the first 10 or 15 years, you will likely have paid a lot of money (above and beyond what you would have paid for just having the death benefit of a term policy) and get very little in return.  A permanent policy is really only appropriate if you know that you’ll stick with the policy for the long term.

Permanent life insurance is a good option for some people.  But if you choose to purchase it, make sure that your decision is based on independent research or advice from a qualified professional who does not have a vested interest in your decision.  The premiums – and thus the commissions – are significantly higher on permanent life insurance policies; if the person advising you to opt for a permanent policy is also making a commission based on the policy you buy, you might want to get a second opinion.

If you have life insurance through your employer, be sure you know how much coverage it provides and how far that would go.  If you need to add additional life insurance coverage, a basic term policy of 20 or 30 years will probably do the trick.  Premiums are based on age at issue, so the younger you are when you get your policy, the less you’ll pay for the life of the policy.  And since life insurance policies are medically underwritten, the healthier you are, the better rate you’ll get.  The time to make sure that your family is protected is today.

As an example, if you’re a very healthy 35 year old, you’ll probably find it relatively easy and inexpensive to secure several hundred thousand dollars worth of term life insurance.  But if one of your hobbies is rock climbing, the premium on the life insurance policy can easily be tripled or quadrupled by most carriers.  The standard underwriting action in a case like this is to bump the rate from “preferred best” to “preferred” and then to add an additional annual amount ($2 – $2.50, for example) for every thousand dollars in life insurance coverage.  So a half million dollar policy can easily increase in premium by more than $1000/year if the applicant participates in “risky” activities.

However, underwriting does vary from one insurance carrier to another, and some are more lenient than others for specific activities and health conditions.  If you’ve applied for a life insurance policy in Colorado and received a rate increase because of health or lifestyle, there may be other options that would allow you to purchase the same amount of insurance for a lower premium.  We can compare options for you and help you find the best value for your insurance dollars, and there is never a charge for our services.

Aflac is also adding to their coverage options, with higher face value policies available than they had in the past.

We work with an Aflac representative here in Colorado, who can provide life insurance as well as a range of other products for you and your employees.  Please contact us if you would like additional information.

Determining whether return of premium life insurance is a good choice depends a lot on your own habits, goals, and tolerance for risk. Let’s consider a hypothetical situation of a 35 year old female who is looking for a $1 million, 30 year term policy. Let’s say she can purchase a traditional term policy for $650/year, or a return of premium policy for $1175/year.

If she buys the traditional term policy, she will spend $19,500 on the coverage over the course of 30 years ($650 x 30). This money is gone forever, but it has done its job of purchasing peace of mind for her and her family.

If she buys the return of premium policy, she will spend $35,250 on the coverage ($1175 x 30), but if she is alive at the end of the 30 year term, she will get the entire amount back. This option costs a total of $15,750 more than the traditional term policy, so the trade off between the two policies is what she could have done with that money if she had purchased the traditional policy instead.

Here’s where an investment calculator comes in handy. The return of premium policy will cost $525 more per year than the traditional term policy. We can use an investment calculator to determine what sort of return she would have to get on that money if she invested it on her own, in order to end up with at least a total of $35,250 at the end of 30 years (since that’s the amount she will end up with if she buys the return of premium policy).

There are numerous online investment calculators that you can use. Each person’s situation will be different in terms of taxes (ie, one person might choose to invest the difference between the premiums in a traditional IRA, with tax-deferred growth, while another person might put the money into a taxable brokerage account) so I’m focusing solely on the growth of the money without taking taxes into consideration. Here is an example of a simple calculator that you can use to determine the effective rate of return that the return of premium policy is giving you.  For our hypothetical lady, we can input 30 years, an initial principal of zero dollars, and an annual investment of $525.  We can reduce the tax rate to 0%, but if she is investing her money in a taxable account, that amount will have to be increased.  Then we can move the little blue arrow on the rate of return line until the investment total (in blue at the top of the calculator) gets to at least $35,250.  For our lady, this happens at 4.8%, at which point, her investment would be worth $35,324 after 30 years (if she invested her money in a taxable account, her rate of return would have to be higher to offset the loss to taxes).

So if this lady were to get average returns of more than 4.8% in another investment vehicle, she would be better off getting the traditional term policy.  But if she likes the idea of a guaranteed rate of return and forced savings, she might be better off with the return of premium policy.  The final decision will be up to you, but understanding the numbers behind the premiums will likely make the decision easier.