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Personal Insurance a Necessary Evil or Waste of Money?

The purpose of insurance coverage is to help meet short, mid and long term goals.

 
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Orlando, FL -- (SBWIRE) -- 02/25/2014 -- Insurance coverage may be construed as a necessary evil, especially when unexpected challenges occur. For example, most states require some form of mandatory automobile insurance with required minimum levels of coverage. No one plans on being in an automobile accident, but having the coverage helps negate some of the liability costs associated with the occurrence. Conversely, insurance may be purchased voluntarily, i.e., life, disability, umbrella/personal liability, etc. There are many different types of insurances available and for specific needs. The availability of insurance-auto, home, life, disability, commercial, long term care, etc., are a few types available and help mitigate the cost should a fortuitous event transpire.

Your Financial Needs Should Be Known
The purpose of insurance coverage is to help meet short, mid and long term goals. Costs are associated with purchasing insurance and it is important the correct insurance is obtained to ensure an adequate amount and purpose of indemnity coverage. Proper planning can minimize your potential negative financial exposure by leveraging your opportunity of protection by maximizing your available insurance coverage. Contracts and terms can vary greatly and it is important a purchaser is acutely aware of what anticipated needs are insured, the expected coverage and reimbursement, listed exclusions and restrictions. Additionally, within a type of insurance a subset of specific terms and conditions may exist. “While situations vary, recommendations include working with one agent or broker who writes for a dozen or more companies, especially if you have health issues.”

The adage of two certainties being paying taxes and death may be true, but the opportunity to purchase certain insurances may not be as certain as someone ages. Life insurance purchased by someone in their 30’s will be less expensive vs. someone purchasing a similar policy in their 50’s. Costs are determined using different factors. The realistic truth of a 50 year old paying more is because of actuarial probabilities of life expectancies and a greater likelihood of an older person developing chronic illnesses. A policy may be offered but with an additional policy premium making it more expensive or worse the proposed insured being deemed uninsurable because of perceived increased risk to the insurance company.

The Underwriting and Examination Process
There are different types of life insurance available and costs vary depending on the selection. Age being one factor, the health of the proposed insured also determines if a policy is written preferred, standard or rated. The healthier the proposed insured, the likelihood a better premium is offered. Most policies require a physical examination and blood analysis. Depending on the type and amount of insurance requested, the examination is usually performed by a nurse or trained individual, i.e., EMT or paramedic, physician assistant, etc. An examining doctor is generally only required if a large death benefit or customized policy is requested or the proposed insured’s medical documentation is extensive. In addition to the above, premium costs are increased by policy riders (additions) which may be attached to the insurance policy contract. These include: waiver of premium, automatic premium loan provision, waiver of mortality deduction charges, accidental death benefit, guaranteed insurability, cost of living rider, payor benefit rider, spouse rider, children’s rider, term rider, etc.4

The application process may appear cumbersome, but is important to both the proposed insured (offered the best possible insurance and premium depending on their age and health) and insurance company (offering a policy based on the statements made in the application, submitted medical documentation and physical examination, anticipated premiums received and death benefits to be paid). A word of caution is to be truthful with the application responses. If later found statements made or documentation submitted were not truthful or fraudulent, the policy may be cancelled; benefits forfeited or reduced, or worse face possible prosecution for fraud.

Options With Purchasing Life Insurance
The two main types of life insurance are term and permanent insurance.5 Term insurance is generally cheaper but becomes more expensive over time. It is usually renewable annually but as the insured ages the policy costs increase and without any cash value accumulation. As an aside, knowing term insurance costs rise over time, an insured may purchase a level term policy which locks in the annual rate over a specific amount of years. Additionally, convertible term policies with guaranteed renewability are options to consider when shopping term policies. The cost difference may well be worth the peace of mind allowing the insured the option of converting to a permanent policy despite a negative change in health history and with the availability of building cash value.6

Permanent insurance has annual premiums remaining level (although there may be exceptions) and some consider this a combination of term type insurance (specified death benefit) and cash value accumulation. The following are examples of permanent insurance: whole life, universal, variable, variable universal, etc. Whole life cash value grows with premium payments and the company paying a specified rate of return vs. the other permanent policies which build anticipated value based upon the return of a percentage of the invested premium. If invested returns exceed policy costs the insurance policy remains in force and builds cash value. However, if returns fall below that necessary to maintain the basic policy costs, an insured may be required to add to the policy or risk forfeiting the coverage.

Upon death the death benefit value of the policy may be given outright or used for a specific purpose as directed by the insured for specified beneficiaries, i.e. guaranteed benefit to ensure family needs, pay college costs, retire outstanding mortgage or loans, estate tax liabilities, charitable and other bequests, etc. In specific cases or needs, irrevocable life insurance trusts (ILIT) may be formed. The benefits of an ILIT are many, but in essence the value of the death benefit is not included in the insured’s gross estate. The trustee makes distributions per trust provisions established by the grantor (insured). The downside of an ILIT is once established the insured no longer has access to any cash value or loan provisions of the policy. Charitable giving after death using a life insurance policy is also an option. However, it is recommended an estate planning attorney be consulted for specifics regarding an ILIT and charitable trusts.

Going Without Insurance
Self-insuring may be an option by saving and investing to create sufficient assets to take care of your family and obligations at your death. That might work if you could guarantee you will save diligently and live long enough to do so. However, if you die or are disabled before you have amassed those assets, your family is unprotected. Another option is buying (convertible) term insurance and investing the difference between the term costs and those of permanent insurance.

The question becomes are you financially sound or believe your investments will provide adequate returns no matter market gyrations. Upon your death will your beneficiaries (i.e., family) have the where with all to maintain their lifestyle including any anticipated or unexpected increased costs going forward? Additionally, if your plans go awry can you be certain you will be insurable should you need life insurance?

Necessary Action Steps
Unfortunately, once an event occurs there is no option of purchasing coverage after the fact. The critical factor is obtaining sufficient coverage to replace your income for the years you expect to earn it, ensure your family’s needs are met, plan on eliminating debt and all at a cost you can afford. In most cases young families should avoid expensive permanent insurance with small death benefits, but instead purchase inexpensive term insurance with necessary levels of death benefit. This is a very important matter and a family with small children needs all the protection it can get and at an affordable price.

Becoming proactive involves time and effort, but the alternative of not doing so may prove to be exceedingly costly and troublesome to you and your family. When planning for unexpected occurrences think about minimizing and mitigating your risks. "Life insurance never gets cheaper; it's not like buying last year's iPhone. Life insurance will continually get more expensive as one ages. That's why it's important to insure now rather than later".7 Consulting with a knowledgeable professional can help guide you through the maze of options by helping you select and purchase the best coverage and value for the required protection.

Reprinted with permission from the March 2014 issue of Dynamic Chiropractic Insights, http://www.dcpracticeinsights.com.

About the Author: H. William Wolfson
H. William Wolfson, DC, FICC, MS, is Director of Professional Services at American Financial Advisors (AFA), Inc., based in Orlando, Florida with offices in Orlando and New York. Dr. Wolfson is a registered representative with Foothill Securities, Inc., member FINRA/SIPC and a registered investment advisor representative (IAR) with AFA. Foothill Securities, Inc. and American Financial Advisors, Inc. are not affiliated companies. Dr. Wolfson obtained his Masters of Science (MS) Personal Financial Planning from the College of Financial Planning and is a candidate for CFP® certification. Dr. Wolfson remains active and engaged in chiropractic by volunteering his time as NY Alternate Delegate to the American Chiropractic Association and serving on assorted committees. He is also a board member of the New York State Chiropractic Association. Dr. Wolfson retired after twenty seven years of active practice and may be reached at Hwwolfson@AFAdvisors.com.

References
http://www.dfs.ny.gov/consumer/cli_purpo.htm.
http://www.bankrate.com/finance/insurance/6-myths-buying-life-insurance-1.aspx#ixzz2oFRf2qNX.
http://www.dfs.ny.gov/consumer/cli_h_cost.htm.
http://www.dfs.ny.gov/consumer/cli_rider.htm.
http://www.dfs.ny.gov/consumer/cli_basic.htm.
http://www.fool.com/insurancecenter/life/life07.htm.
http://www.bankrate.com/finance/insurance/6-myths-buying-life-insurance-1.aspx#ixzz2oFQFfE8G.