Whole life, universal life, and variable universal life are all being purchased more this year than last year.  But term life insurance did not show gains; annualized premiums for term policies dropped 11% in the second quarter of 2010.  I find this interesting, given that term life insurance tends to be the most appropriate choice for the majority of the population that needs to secure death benefits.

It’s possible that the slowly-rebounding economy is responsible for the shift from term to permanent life insurance products, and for the overall upswing in total annualized premiums.  For the last couple years, the recession has meant that most of the country has been tightening their budgets.  Term life insurance policies are a lot less expensive than permanent policies, so for people who needed to buy life insurance during the recession, term products were likely more popular.  But now that the economy is showing signs of recovering, people may be more apt to purchase higher-cost permanent life insurance policies that grow cash value or include an investment component.  It will be interesting to see how the numbers play out for the rest of 2010… will term life insurance policy sales bounce back, or will the growth of permanent policies continue?

A recent NPR article details how the families of servicemen and women killed in battle are being given “checkbooks” that represent the value of the fallen soldier’s life insurance policy. The life insurance companies are keeping the money in their own investment accounts, earning several percent interest, and paying 0.5% interest to the policy beneficiaries. The carriers point out that if they didn’t offer this option for the families to earn half a percent interest on the money, it might just sit somewhere, earning no interest at all. I suppose that’s true, but families should be aware that they have lots of options, and that taking the default choice of letting the life insurance company handle the money for them (and keep a good chunk of the interest earned) might not be the best one.

Trying to figure out what to do with a large chunk of money from a life insurance settlement can be difficult in the best of times, and nearly impossible when a person is grieving. It makes much more sense to sketch out the details of what your family would do with any life insurance money before that situation arises. If you don’t die while your life insurance policy is in force, the plan won’t ever be needed. But if you do pass away and leave your beneficiaries with life insurance money, it will make things a lot easier for them if the family has a plan in place and they can simply use the money as planned, without having to make decisions while grieving. And it will make it much less likely that the surviving family members will be duped by unscrupulous “advisors” or companies that don’t have the beneficiaries’ best interests in mind.

A financial advisor can provide advice, but there are also lots of financial advice websites that can provide guidance for people trying to figure out what to do with any sort of windfall, including life insurance proceeds. Planning now for what you might do with life insurance money will likely make things easier if and when you find yourself receiving life insurance following the death of a loved one.

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.