When Life Insurance Becomes a Liability
None of us have been endowed with immortality. Yet for a safe and secure mortal life every one counts on life insurance. Life insurance has become an integral source of protection for every household. What if one day this safety glass shatters? Why does this rose called life insurance come with so many thorns attached? Unfortunately, this global turn down turned you safety haven into a constant source of worry.
These tough times have brought about an increase in the insurance premium that many households pay. This has brought additional stress to families’ finances. Failing to pay the increased insurance premium leaves you with only two difficult options. Either you have to compromise on the coverage provided or worse still, forgo the policy altogether. It has been observed that many people choose to bargain and reduce their coverage. However, this is not a very wise option. It does not leave your family better off either today or tomorrow. Expert’s advice people in such situations to look for and consider other insurance policies and plans befitting your financial and family position.
Those who had chosen life insurance as a means of investment have received the nastiest blow. They face the dual problem of shattered dreams of high returns and increase in premium amounts. According to Loretta Nolan, president of Loretta Nolan Associates, a certified financial planner in Old Greenwich, CT, clients with variable policies feel the real pinch. Previously, people were lured towards these policies as it seemed to provide benefits of insurance protection and tax deferred investment account which helps to pay the premiums. The policy makers as well as policy holders harnessed dreams of high returns on investments during the bull market. Many people vouched on the fact that these returns would limit the size and duration of premium payment. People kept running on the bull and forgot the bear. Some ignored the warning and some turned deaf years to the fact that the markets may see downsizing.
Loretta Nolan goes on to advice that if you are on the verges of surrendering then do a policy stress test first. Assume that your investment earns a very humble four percent. At this rate ask your policy provider to do a future forecast. If you can’t afford the premium amount at this rate then yes, it is time to reconsider sooner rather than later. If you do not want to quit your variable policy completely, then you should trim it down. You need to analyze whether your main concern is insurance or investment. If insurance remains the top priority then opt for a simple term policy. If you previously had a say $500,000 variable policy, then reduce this to $200,00 and get a new term policy of $300,000. This sort of an arrangement should keep you decently hedged, protected and of course insured. Also, if you want to completely get rid of the variable policy then go ahead with an annuity plan. This idea comes highly recommended from Glenn Daily, a fee only insurance consultant from Manhattan. The annuity plan allows you to offset your losses with future gains. For instance, if you lost $30,000 in your variable policy then the first $30,000 of profit in the annuity would be totally tax free.
Has your net worth taken a 30% hit? If yes, then you need more insurance to protect your family. This advice holds significant till your stock portfolio and home regain on some lost value.
According to Richard B Freeman of Round Table services, a Westport, CT wealth management firm, it is more an art than a science to determine how much insurance you need. Do not rely blindly on software calculations; they tend to provide inflated figures. Your focus should be on two priority areas: paying off your mortgage and covering your child’s college education, and more importantly, to create income for your survivors.
You can increase your insurance coverage by opting for a term insurance group plan through your employer. However if you are healthy then an individual term policy may work better for you. In fact this becomes all the more lucrative for you if you are a woman in a state with unisex rating for group insurance. Marc Cortazzo, senior partner at Macro Consulting Group, a Parsippany, N.J., financial adviser, adds that a person in poor health should invest on group insurance at work. This can be converted into an individual policy when you leave work, albeit at a price. A person who is suffering from severe illness or ill health should not bother with the normal procedure of application as it will undoubtedly get rejected. In such situations the best bet would be to get a high risk insurance broker to advice you and help you apply.
Last but not the least; be sure about the health of the company you are investing in. You will hardly ever come across an agent who tells you about problems with the insurance company she works with. Look for agents who work for diversified companies and policies. Consider diversifying your money among high rated companies to get better coverage!