Archive for August, 2008

Scared To Death Of Life Insurance

Life insurance may be the most badly purchased financial product. Some people, unwilling to face the thought of death, never buy coverage at all. Others feel guilty about the prospect of leaving loved ones behind and buy too much. Even those who put their emotions aside tend to fall back on oft-repeated and oft-wrong rules of thumb, such as buying a policy worth five times your annual salary.
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Choosing the right amount of life insurance is no easy matter. Even most insurance agents and financial planners rely on rules of thumb or unsophisticated worksheets — or put the onus on clients to decide how much insurance to carry. Fortunately, understanding a few economic principles will go a long way toward helping you make a smart decision.

According to economists, your family’s financial goal should be to enjoy the highest standard of living possible over a lifetime. That may mean borrowing when you’re young and repaying the loans as you age and earn more. Given your total lifetime income, you don’t want to suffer in youth and live high on the hog in old age, or vice versa.

That’s where life insurance comes in. If you die, the death benefit to your survivors should be precisely large enough so they enjoy the same living standard as they did while you were alive. Life insurance protects your family if you die young. It goes hand in hand with investing for retirement, which protects you against the opposite risk: that you and your spouse will outlive your savings.

The focus on smoothing consumption over a lifetime leads to some counterintuitive conclusions. It indicates that young people are the most likely to be underinsured, that secondary earners and nonworking spouses are the most likely to be overinsured, and that most people should reduce the amount of life insurance they carry as they approach retirement. “When it comes to buying life insurance, economic man is making major mistakes,” economists Jagadeesh Gokhale, a senior fellow at the Cato Institute, and Laurence Kotlikoff of Boston University wrote in a 2002 paper.

Gokhale and Kotlikoff have done more than chastise people for bad decisions. They have distilled their research into a sophisticated program that digests scads of personal data and spits out a multiyear financial plan with annual targets for spending, saving, and insurance coverage. The calculations are so complicated that even a state-of-the-art PC takes 15 seconds to produce a result. The $149 program, ESPlanner, is sold by a company that Kotlikoff helped found, Economic Security Planning Inc. in Lexington, Mass.

Even if you don’t buy the program, you can learn a lot by looking at life insurance through an economic lens. Start with what economic theory says about the young. Many people who are starting families buy a little life insurance coverage, then add more as their incomes increase and they can afford more protection. That’s the opposite of what you should do. You want the most coverage when you have just started a family, because the insurance has to cover decades of future earnings that will be lost if you die. As you get older, you can afford to decrease coverage because you have fewer years of earnings to make up for, your spouse has more assets to live off of and fewer years of life remaining, and your children are closer to being on their own.

YOUNG IDEA
Those factors have big implications for what kind of insurance is appropriate. Insurance agents often advocate cash-value policies because they double as investment vehicles. With simple term insurance, they argue, you’re left with nothing to show for your years of premium payments. That’s true. But the only way most young people can afford to buy as much life insurance as economic theory says they need is to opt for term policies that pay a death benefit and nothing more. A 25-year-old can buy a $2 million, 30-year policy from a reputable insurer for about $1,600 a year. That same premium would buy a death benefit of only a quarter as much — $500,000 — if it were put into a variable universal life policy that has an investment feature. Younger people should place protecting future income ahead of piling up savings, but many succumb to agents’ sales pitches for cash-value policies. According to the latest available numbers from the American Council of Life Insurers, whole, universal, and variable life policies account for 84% of premiums, vs. only 16% for term policies.

Thinking like an economist can sometimes lead you to buy less insurance, not more. In ESPlanner’s software, secondary earners often require little or no life insurance, even taking into account that the secondary earner (most often the wife) often provides essential services that must be replaced, such as child care. Why? Mainly because child care is a relatively short-term issue. When the secondary earner is gone, the need to support that person until, say, age 95 is gone, too.

If you want to follow economists’ advice and reduce your coverage as you approach retirement, inflation will take care of part of your problem by eroding the real value of your death benefit. A $2 million policy will be worth just $1.1 million in today’s dollars in 20 years, assuming 3% inflation. Also, some insurers offer policies that have level premiums but declining coverage over time.

A good way to shrink your coverage over time is to buy policies of different durations and layer them. If you want to start with $1.5 million in coverage and then have it decline, buy three $500,000 policies. Make the first expire after 10 years, the second after 20, and the third after 30 years. That will give you a smoothly declining amount of coverage as you glide toward retirement.

No one enjoys buying life insurance. But if you think like an economist, you can come away feeling like you’ve at least correctly calculated the odds.

Life Insurance - A Funny Story

A life insurance broker named Steve was always the top salesman for his company. In fact, he just completed his 8th straight year as the number 1 insurance agent when he decided it was time to hang ‘em up and retire.

His best friend and partner James took him out for a drink one last time – on company time, of course. James asked, “Steve, you’re the best life insurance agent I’ve ever seen. For the past 8 years, you’ve been outselling everyone. And every time I ask how you do it, you never tell me. Now that you are retiring, let me in on your secret. How do you sell so many life insurance plans?”

Steve thought for a moment. “You know what, James, you’re right. I do have a secret to selling life insurance. I’ve kept it to myself for all these years. But now that I am retiring, I can’t think of a better person to keep it alive than you. So, I will tell you how I do it.”

James started to get more excited as the thought of having this wonderful knowledge coursed through his mind. He could hardly contain himself.

“Tell me, Steve. What is it? I’m dying to know.”

Steve took a sip from his drink and leaned back on his chair, scanning his surroundings to ensure that this top-secret data would not fall into enemy hands. He then leaned forward and began to speak.

“James, when you first start, you
have to tell them about all the features and the benefits of the plan. Make sure you tell him – and always him – that it is his duty as the man of the house to protect his family. Doing otherwise would be considered a failure as a husband and as a father.”

James seemed unimpressed. “Everyone does that, Steve. You know that. That isn’t very insightful.”

Steve did not seem concerned with James’ protest. “Easy, relax. Just listen to me, and it will all become clear.” Steve took another sip while James sat both anxious and nervous.

“Now,” Steve continued, “during every presentation, I always suddenly stop my pitch and ask the client if he is feeling OK. Inevitably, he will always answer ‘yes’ to that question. When he does, I look at him in a strange way. And every so often, I will ask if there is anything I can do for him. Maybe get him a glass of water or if he wants a moment to himself.”

“Interesting approach” replied James. “How effective is it?”

Steve looked around and then looked James square in the eye. “To be honest, it rarely works. But, it’s the next step which always hooks them.”

James could no longer take it. “Steve, please tell me!”

Steve smiled. “I always say: ‘Please don’t let me scare you into making a rushed choice. Sleep on it tonight. IF you should wake up in the morning, please give me a call and let me know. I’ll by DYING to hear from you.”

First Plan and Invest in the Life Insurance Policy for the Future

Think about investing in the life insurance policy for the safety of your family and see the changes in your life. After you have invested in the life insurance policy you will feel very fresh and you start looking towards life more positively. You will feel the urge to get more changes in your life style. Well, there is no harm in getting changes in your life unless and until you know that you have saved enough for the future. Because saving for the future is very important. You can lead an easy life in your old age. Now at present when you are young you have the potential to work hard and you should try to earn as much as you can. Then you will find your life very easy going. Once you have planned and saved or invested in any of the life insurance policy for the future, then you can bring changes in your life style very efficiently. You can renovate your house. You can get all the luxuries in your house for your self and your family. You can buy an air conditioned car for your self, a microwave oven and a dishwasher for your wife and a new television and a laptop for your children. All these luxuries can be bought after you have planned and invested very wisely for your future.

I am working in an office where I can earn enough to fulfill the desires of my family.
I have invested in the universal life insurance policy for the financial security for the future. I have a very positive vision towards life. I aim to earn more and give more to my family. I want to give them more than what I give them today. For this I have to work harder. That is not a problem with me; I will definitely work harder for the desires of my family. This attitude of mine will lead me towards success as far as I feel. As I mentioned earlier, that I have already invested for the future, and now I wanted to but a new car for my son who is to turn 18 years this December. I want to gift him a car for his birthday. I took a loan from the company and took a car for my son and now I am relaxed that even if anything happens to me before I could repay the loan the life insurance policy will help my family to repay the loan. This way I can fulfill the requirements of my family with the help of the life insurance policy. Even you all can follow this procedure in your life. First of all you should plan to buy a good life insurance policy which you think will suit your needs and budget, then you should very wisely invest in it and then you should try to buy the comforts and luxuries which your family needs for today. First you should try to secure their future and then spend for today. I am sure if you follow these steps in your life even you will be happy like I am in my life.