Life Insurance and taxes

[DavidIQ]

My wife and I are trying to conduct some research in order to select an appropriate life insurance. The coverage amount should be around $200,000 - $250,000. Since we have State Farm for our auto insurance we looked into them first. Cost for a 30year term policy would be aprox. $27 for each of us. 20year term would lower that to just under $20. This is affordable to us (especially after seeing how much the permanent ones are...). Is term life insurance the way we should go? Is there really a better life insurance company than another out there?

One big question my wife had was...if either one of us was to die would the money disbursement be taxed? Reason being is if $250,000 is what the policy is for will we have to save $50,000 or whatever amount in anticipation of getting taxed for this "income"?

Thanks!

 

[indaville]

One big question my wife had was...if either one of us was to die would the money disbursement be taxed? Reason being is if $250,000 is what the policy is for will we have to save $50,000 or whatever amount in anticipation of getting taxed for this "income"?

Thanks!

Life insurance proceeds are always income tax free. I would look at other companies as well, work with someone that is a broker and can quote many companies. With the info you gave it would be hard to determine is term insurance is right or not.

Matt

 

[NHB_MMA]

My wife and I are trying to conduct some research in order to select an appropriate life insurance. The coverage amount should be around $200,000 - $250,000.

It would help to know how old you are, what responsibilities you have, any children, and a rough idea of your financial condition. Most formulas for calculating life insurance needs come up with a figure around 8-10 times a person's annual income.

Since we have State Farm for our auto insurance we looked into them first.

Good company.

Cost for a 30year term policy would be aprox. $27 for each of us. 20year term would lower that to just under $20.

Again, this is where age comes into the equation. Those 20 and 30 year policies would probably be pretty good if you're 38, but inadequate if you're 23.

This is affordable to us (especially after seeing how much the permanent ones are...). Is term life insurance the way we should go?

There are pros and cons to term and perm and there is no universal answer, though some agents have a hard time accepting that. For starters, almost no one can afford the coverage they need entirely in permanent policies. I mean, you maybe can, but it would take a huge financial commitment on your part and it would be hard to justify it because there is some opportunity cost with all that money going into permanent insurance.

Term is a wonderful product because it gives you great protection for your dollar and most people should have the bulk of their face amount coverage in term insurance. 100% of your coverage in term may be a good option for people with a nearly certain future ahead of them. Examples that come to mind would be government employees where it's pretty much a sure thing that their retirement money is safe and going to be there. People that have a decent inheritance coming to them can anticipate their financial situation improving in the coming years, although that is never a sure bet. If you are sure you will have no need for the cash value of the policy and that the life insurance will not be necessary after the period of the term policy ends, then term is a good option.

The other thing to consider is that term policies pay a death benefit about 1%-2% of the time. Statistically about 12% of the population dies before age 65, but some are never able to qualify for coverage to begin with for medical reasons, never bought it at all, or bought a term policy that lapsed before their death. I've heard some people dispute the 1%-2% figure, but I've heard it from different sources. The point is there is a very good chance that if you spend the money on term, it will never return anything, but that is better than the alternative of an early death. You NEED life insurance with an appropriate death benefit, first and foremost, because leaving your loved ones behind with nothing is catastrophic. Do not let the likelihood of your living past your term coverage period keep you from buying life insurance. That is the wrong way to look at it. But for the term vs. perm question, I'm simply pointing out that you need to be okay with the fact that, odds are, your term coverage will likely never pay out.

The question some people ask is "how long will you need your life insurance?" Most would say until retirement when your spouse will have some of your Social Security and other retirement benefits to live on and that is a pretty good answer for most. But it is actually an estimation, and the question is impossible to answer for certain. Nobody knows how the future is going to turn out. People that are staunch opponents of term coverage and believe ALL retirement money should be in the market have one problem they're overlooking--it assumes perfect scenarios. It assumes that you actually do a good job of investing in the market and that, if funds are needed upon your death, it will be a good time to liquidate them. It also assumes that you won't have any obligations normally associated with life insurance at that time.

Consider what I would recommend to many people, looking at using term for the bulk of your insurance and adding some permanent coverage as a hedge against any unanticipated downturns ahead in life, and as a small conservative retirement assets, should you decided to take cash dividends down the road. I would suspect your 250K death benefit to be a little low, but assuming that is what you go with, you might consider 50K in permanent and 200K or so in term coverage, depending on your age and of course the other forementioned factors such as the stability and certainty of your retirement assets. I'm not saying this is the best way to go, but price it out and consider it.

Is there really a better life insurance company than another out there?

Absolutely. You want to consider the ratings and financial strength of the company as well as its history or that of any parent company. I would say that minimum A.M. Best rating I would ever buy term from would be "A" if not "A+". I once saw the requirements for the A.M. Best system at a glance and I remember being unimpressed. The majority of insurance companies writing much business out there seem to be at least "A" rated, largely due to agent reluctance to write business that falls outside of that scope, I'm sure. From what I remember seeing, it doesn't seem that hard to get at least an "A-" rating and the minimum reserves required by most states to be allowed to conduct business are scary, IMO. What I'm saying is anybody that is even worth looking at is going to be somewhere in the "A" range and you can get reasonably priced coverage from those carriers, another reason why I would make it a minimum requirement. You're talking about a potential asset you need to be around for at least 20 or 30 years, so you need financial stability.

If you do decide to get any permanent coverage, this is even far more important because you actually have some equity tied to the policy in addition to death benefit and the likely fact that it will be in force for more than 30 years. I also recommend only buying permanent coverage from a mutual company. The only possible exception I personally would make would be a VUL because the separate account aspect is not controlled by the insurance company, but that's another discussion. A mutual company has more of a long-term focus on its own financial decisions that impact its stability. There is not the temptation of publicly traded stock to entice a CEO to make decisions against the long-term interest of the company in order to create a temporary surge in the stock value. There is also little likelihood that another insurance company will buy out your company and possibly take it down the drain, and I've seen that happen. Changing from a mutual company and sale of the company would have to be approved by the policyholders.

Fortuately, State Farm meets the requirements I would demand of my own insurance planning and the rates I've seen seem reasonable, all things considered.

One big question my wife had was...if either one of us was to die would the money disbursement be taxed? Reason being is if $250,000 is what the policy is for will we have to save $50,000 or whatever amount in anticipation of getting taxed for this "income"?

No. Life insurance death benefits pass on tax-free, which is a major benefit to life insurance when compared to many other financial vehicles.

Hope I've been of some help. You'll get some good advice from others too and hopefully make a good decision on your coverage.

 

[DavidIQ]

Wow! :shock: that's a LOT to take in but VERY informative and answers a lot of questions. This is a little disturbing though:

The other thing to consider is that term policies pay a death benefit about 1%-2% of the time. Statistically about 12% of the population dies before age 65, but some are never able to qualify for coverage to begin with for medical reasons, never bought it at all, or bought a term policy that lapsed before their death. I've heard some people dispute the 1%-2% figure, but I've heard it from different sources. The point is there is a very good chance that if you spend the money on term, it will never return anything, but that is better than the alternative of an early death. You NEED life insurance with an appropriate death benefit, first and foremost, because leaving your loved ones behind with nothing is catastrophic. Do not let the likelihood of your living past your term coverage period keep you from buying life insurance. That is the wrong way to look at it. But for the term vs. perm question, I'm simply pointing out that you need to be okay with the fact that, odds are, your term coverage will likely never pay out.

Maybe I'm understanding this wrong. You mean to say that in the unfortunate event that either one of us dies the chances of the other getting the insurance payout is 1-2%??? Or are you referring to something else?

FYI she's 26 and I'm 27 and we were looking for enough coverage to pay off the mortgage and all bills which actually amounts to less than $150,000. The extra money is just that...extra money. Either one of us working at our current jobs can maintain ourselves on a regular basis but not with all of these bills and mortgage. Oh yeah...and we've never smoked.

 

[Sam]

No David,
What that means is, the % of people who get those policies, and die while still in the middle of them is very low. Just like you will both probably still be alive in 30 years, and so you will fall in that 98-98% However, if something were to happen to you while the insurance was in force, you would absolutely get paid.

 

[STIBROKER]

this is a good place to run term rates.......

http://www.lifequotecenter.com/index.htm

 

[James]

FYI she's 26 and I'm 27 and we were looking for enough coverage to pay off the mortgage and all bills which actually amounts to less than $150,000. The extra money is just that...extra money. Either one of us working at our current jobs can maintain ourselves on a regular basis but not with all of these bills and mortgage. Oh yeah...and we've never smoked.

Well, some people around here have trouble with the idea of one or the other spouse able to maintain in the event of one dieing. Obviously this is the emotional tug to sell higher amounts of insurance, which I'm not totally oppose too but, some take it to limits of lunacy.

I would say at the prices quoted for State Farm (a great company) is okay, if you trust and like your agent then its a great place to buy from. Some here will say Banner is 2 dollars cheaper but just how many Banners would it take to make one State Farm?

 

[STIBROKER]

I would say at the prices quoted for State Farm (a great company) is okay, if you trust and like your agent then its a great place to buy from. Some here will say Banner is 2 dollars cheaper but just how many Banners would it take to make one State Farm?

and were are these state farm rates....good PC co.......but not a good life insurance co.......

 

[somarco]

For large cases & tough underwriting, SF uses Phoenix. A better choice, but will not stack up against WCL, Banner, AIG, etc.

 

[DavidIQ]

No David,
What that means is, the % of people who get those policies, and die while still in the middle of them is very low. Just like you will both probably still be alive in 30 years, and so you will fall in that 98-98% However, if something were to happen to you while the insurance was in force, you would absolutely get paid.

Ah...that makes sense. Thanks!