Collecting Multiple Life Insurance Policies Leads to Redundancy and Waste

/0 Comments/in , , , , /by

Do you own several life insurance policies? People tend to buy policies piecemeal in response to life events like the birth of a child or an agent’s sales pitch. Collecting life insurance policies is often uncoordinated and inefficient. Just having multiple policies, each with an annual policy fee, and missing volume discounts of larger policies is costly. How do I know if I have too much life insurance and am wasting resources?

Most consumers think this way:
• My agent recommended it; it seems reasonable.
• We are expecting our first child! It seems time to buy.

A proactive consumer thinks this way:
• I’ll get objective opinion from someone who does not sell policies.
• I’ll engage someone familiar with the entire insurance market, rather than primarily representing one company.
• I won’t allow my worst recallable memory to become my baseline (e.g. an uncle who died young), but I’ll think in terms of probabilities.
• I’ll consider the opportunity cost of premiums if invested elsewhere.

Case Studies: The Pastor and the Doctor

I just finished two cases, one for a 65-year-old doctor with no dependent children and the other for a 32-year-old pastor expecting their first child. Despite having good companies (USAA, State Farm, and Northwestern Mutual), they both improved a lot. Insurance consumers can profit from a gatekeeper. Instead, most rock along leaking significant resources month after month, year after year, unaware of how much they could save.

The young pastor had a $100,000 20-year level premium State Farm policy that was 8 years old (12 years left of level premiums) costing $24/month (not a good buy), a 100k term life policy provided by his church, and had just been sold a $750k Northwestern term policy.

I directed him to socialsecurity.gov/myaccount to see what survivorship benefits his child and wife would get at his death: about $2400/month. He was ignorant of this, which is a shame that something so relevant to an insurance purchaser is rarely addressed by an agent. Social security survivorship benefits for him are essentially equivalent to a $500,000 term policy.

He replaced the State Farm’s 100k and NML’s 750k term, with a 500k personal policy. 500k with the 100k through work buys a nice house near family, a 100k education fund, and a 100k emergency fund. With no mortgage and liberal savings to replace a car, etc., Social Security will pay the bills. She’s a teacher who could work once their child is school age.

We talked about the low probability of death within 20 years, which makes for better choices than a fear-inducing (What if…?) sale’s pitch. This improbability translates into a high probability of “wasting” those premiums. We considered the opportunity cost compared to putting more of it into a Roth or accelerating the mortgage. The insurance amount respects the wife’s emotional temperament.

The Northwestern term cost $407 first year, growing to $1200/yr by the 20th year. The new policy costs $316/yr guaranteed level for 20 years. He dropped the State Farm and Northwestern, the doctor dropped the USAA, big name companies that are strong in property and casualty and cash value policies, but not term insurance.

The Potential Savings

This 32-year old initially saves $32/month, which may not seem like much. However, in a Roth using a Sector strategy, it could grow to $25,000 by their baby’s first college year, or over $1 million in 50 years, his normal life expectancy. Rather than buying excessive insurance paying only in the unlikely event of death within 20 years, savings are redirected towards life events that normally occur.

The doctor had collected a hodge-podge of life policies over his career. We started with an income goal for his wife and saw he was over insured. I evaluated each policy (NML and USAA cash value and AMA term), and he began dropping the poorest and keeping the best. This will save $400/month from the first three, plus more from the one Northwestern he kept but modified. His health is good.

I guarantee clients save my fee back within 18 months, a 60+% return. This doctor saves it back in less than three months. Please see Testimonials. I’ll give an initial interview free. Call me at 706-722-5665, or email to talk about your situation.

Making a 10% Rate of Return by Paying Premiums Annually

/0 Comments/in , , /by

Many people pay monthly, quarterly, or semi-annually for things they could pay annually.  Consider an insurance policy costing $1000 annually or $87.50 monthly.  How much does it cost to pay it monthly?  In absolute dollars, it’s an easy calculation: twelve $87.50 payments total $1,050 or $50 of annual interest.  But if I have at least $1,000 in savings, the question becomes, “Should I tap savings to pay annually and save $50, or should I leave savings undisturbed to earn interest?”  What does the $50 savings translate into as an interest rate and how does that compare to the rate of return I’m earning on savings?

At first blush one might think paying monthly costs about 5%, since $50 divided by $1000 equals 5%.  However, the outstanding balance to the insurer reduces each month.  Initially it’s $1000, but by year end it’s only $0.  So, the average outstanding balance for the year is around $500, making $50 closer to 10%.  Paying annually effectively saves about 10% on the money you must withdraw from savings to pay annually.

A financial calculator reveals the exact annualized interest cost for this example to be 10.8 %.  But it gets better!  Because interest must be paid with after-tax dollars, saving it is like earning 10.8% tax-free; whereas a 2% money market return, after federal and state income taxes, nets less.  I can effectively multiply my yield five times!  The bottom line is if I have enough in savings to pay annually, I’ll gain a lot more saving finance charges than earning a low taxable interest rate.

If you don’t have a financial calculator and want to know how this relates to your situation, do like we did in the above example: Multiply the monthly payment by 12 to see how much extra you pay vs paying annually ($50); divide this by the annual payment ($1000); double the resulting 5% to 10%.  This will give you a percentage factor.

I wrote this article years ago when one could earn 5% on money market accounts, to show that saving 10% finance charges was a better use of savings.  Since then money market rates have declined, while finance factors with many insurers stayed the same, making the advantage even greater.

For insurance policies, typically you can change to an annual payment mode even if you’re not at the policy anniversary.  Simply ask the company how much is needed to pay to the anniversary.

If you pay annually and decide to drop a policy midyear, typically insurers will refund unearned premium.  You can confirm this when changing to annual mode.

Remember that we are addressing a fine-tuning process for after you’ve addressed more consequential issues such as these:

  • Do I even need this product or service?
  • Is this the best buy, the right type of coverage, the right duration, etc.

There is also a behavioral dimension that can trump saving finance charges.  The discipline of systematic monthly withdrawals from checking is huge.  If you take the annual payment from savings, it’s important to make monthly payments back into savings.  If you spend even one of these, you will more than unravel the interest advantage you have realized.  Automation beats procrastination!

Saving $50 of interest on an insurance policy may not seem significant, but over many years adds up.  Financially successful people often think in terms of percentages, not just absolute dollars.  Moving savings from earning a taxable 2% to saving an after-tax 10% is a dramatically better use of dollars.

 

The Advantage of Using a Multi-company Insurance Brokerage Firm; of Backdating; of Paying Premiums Annually Case Study # 13

/0 Comments/in , /by

I just finished a case that illustrates the advantage of using an insurance brokerage firm representing many companies versus a single company, even a good one such as Northwestern Mutual, State Farm, or USAA.

The best offer my normal go-to company would provide this client was Preferred rather than Preferred Best, because she uses anti-anxiety medication. However the insurance brokerage firm which I suggest for many clients (but from which I receive no commissions, in case you’re wondering) uses a generic application, so without her having to sign additional paperwork they automatically switched her to Metropolitan who issued her Preferred Elite. Met had no problem with her mild medication and the premium difference was 21% less for 15 years. This brokerage firm routinely uses over 30 companies and shuffles risks around based on health conditions, medications, avocations, and occupational hazards, for optimum offers. Insurance underwriting departments have personalities too, and some are more tolerant of certain risks.

We also backdated the policy to be issued at a younger age for a lower premium. Backdating is a common practice allowing the policy to be issued up to six months earlier to gain a younger issue age, for lower lifetime premiums. The downside is you pay premiums for a period when you had no coverage, so you have to weigh the savings against the waste. After careful calculations, even if this insured backdated the maximum allowable time of six months the future savings represented a 16% after-tax return on the “wasted” premium. However she only needed to backdate for three months meaning the future savings represented a 36% tax-free return. It makes me wonder why it’s not automatically done, however agent commissions are a percentage of premium and an older issue age means higher premium, so there is a disincentive to do so.

The final piece of advice which I’ve devoted an entire blog to in the past is the advantage of paying annually versus quarterly or monthly. Sometimes this is a budget issue (can’t afford to pay annually) but the financing charge inherent in a monthly payment is typically 10%. If you take the money out a savings to pay annually, you save a lot more interest than you would earn leaving your savings account intact.

All of these improvements are small nuances compared to the big picture (right-sizing the policy, a competitive company, the right type, etc.) but collectively they are weighty. Once a policy is launched it’s usually carried for decades if not a lifetime, so trimming the premium down upfront is certainly worth the effort

Comparing Northwestern Mutual’s Term Insurance Case Study # 7

/0 Comments/in , , , , /by

I just finished an insurance review for a Michigan business owner. The results were straightforward and with a company I deal with regularly- Northwestern Mutual. NML is an excellent company, as their agents will tell you, but like all companies they have their strengths and weaknesses. An eclectic strategy can use them for some needs but not all. Even in their strong areas (cash value life insurance) there’s a vast disparity among cash value policies within their portfolio. We addressed that with the Dr. Ryan Wetzel who is featured on our Testimonials page with an accompanying blog.

Here I’d like to compare NML’s term life insurance rates to alternatives. The first step is to ascertain the appropriate amount of insurance. This client had $1.2 million of term life insurance with NML. He is well-managed with a strong income, emergency fund, debt-free, and retirement assets. Because of his large young family, should he die, Social Security Survivorship benefits would be over $4,000/month until the children were age 18. This is something he did not fully comprehend. In light of his assets, and after careful review with his wife, they felt comfortable reducing his life insurance to $1 million.

From there it was simply a matter of shopping for a term policy with more favorable rates.
Screen Shot 2015-01-17 at 9.08.35 PM

NML’s term insurance was convertible to a more favorable whole life policy, but the client and I discussed this and he was not inclined is to use whole life anyway. The new company’s financial strength was slightly less than NML’s, however this is not as important for term insurance as for cash-value insurance.

He paid me a fee of $675, higher than most reviews. However it took over seven hours of time, carefully and objectively considering his assets, goals, and sentiments. (I also reviewed his Northwestern disability policy which was left intact, and his wife’s life insurance which they changed for additional savings not reflected above.) He adjusted down to a more appropriate amount after having it brought to his attention the survivorship benefits that commissioned agents rarely explain. There were over 50 emails over several months. I walked him through the underwriting process, though I did not sell the replacing term policy.

We got the best of the best; found a strong company with very favorable rates and he got the superlative risk category. It was worth the effort, he will recover his fee the first 14 months and earn (by saving) a substantial tax-free return on his investment, far better than any other way he could “invest” $675.

Most who think they are with a “great” company have little idea of how much they can save. That’s what objective experienced guidance provides and why Scripture so frequently commends it- Proverbs 1:5, 11:14, 15:22, 20:18, 24:6.