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Guest Post: How Declaring Bankruptcy Affects Your Life Insurance Rate

April 21, 2010 · Filed Under Insurance · 4 Comments 
Today’s guest post was provided by Denise Mancini of Accuquote. Check out Accuquote.com for free life insurance quotes from top-rated companies.

For some people, debt is a part of life, but when debts careen beyond control to a point where you can no longer repay, filing for personal bankruptcy is a way out. However, before you file for bankruptcy, there are important repercussions you should consider, especially facts related to your life insurance premiums.

Bankruptcy and life insurance
If you own an existing life insurance policy, it is usually left untouched by the bankruptcy court, to protect the interests of your beneficiaries. If you own a permanent life insurance, you will be allowed to retain a portion of the cash value that has accumulated on it. How much you are allowed to retain depends on where you live, because the rules are different from State to State. If you have taken out a life insurance policy on someone else like your spouse or your kids, you will have to surrender the same to the court.

Bankruptcy will affect your life insurance rate.

Most people file for bankruptcy because it wipes the slate clean and helps them to start over. It is common knowledge that a bad credit score will adversely affect life insurance premium rates. However, will bankruptcy improve the situation? Let’s explore the repercussions of bankruptcy on life insurance premium rates.

If you are already in deep debt, it makes sense to file for bankruptcy. Buying life insurance with a bad credit score is not a good idea because of the exorbitant premiums you will be charged, which in turn will worsen your financial situation. For someone in this situation, it makes sense to first file for bankruptcy, and then wait a while before applying for a life insurance.

It definitely won’t be easy then too, because life insurance companies see your bankruptcy as a lack of restraint, and being careless with your finances. They therefore have reservations about your ability to pay premiums. It usually takes about 7 to 10 years until your credit report will stop reflecting your bankruptcy.

Buying a life insurance policy after bankruptcy

Since life insurance is a purchase that can never be put off, waiting out for a decade until your credit report stops reflecting your bankruptcy is definitely not advisable. The better option is to buy a 10-year term life insurance policy. You will be paying higher premiums and it may turn out to be quite a struggle, but it is better than putting your family’s welfare at risk. The first few years on a policy are the most expensive for a life insurance company, and their high up-front costs make them very cautious when approving policies. As someone with a bad credit history, you will be considered a risky customer.

The good news is that there are term life insurance companies out there, who will look favorably on your case if they know that your bankruptcy has been completely discharged. The key is to find such companies. Luckily, with the advent of a host of online life insurance quote providers, it is not difficult to identify such companies. All you need to do is, fill up their online form as accurately as possible. Don’t forget to click ‘Yes’ when you are asked if you have filed for bankruptcy in the last 5 years. Based on the information you submit, you will be given quotes from companies that look most favorably on your bankruptcy and on other information you have submitted. These quotes are unbiased, genuine and correct because they are chosen from among hundreds of policies and reflect information in real-time.

Bankruptcy can be a very difficult experience, and you may be tempted to wait a while before getting your life insurance. However, you will risk putting your family going through dire financial hardships. Once your bankruptcy is taken off your credit report, you can request the life insurance company to review your policy, so that you can qualify for lower premiums.

Guest Post: Options for Term Life Insurance Death Benefits Payouts

February 12, 2010 · Filed Under Insurance · 2 Comments 
Today’s guest post was contributed by Denise Mancini of Accuquote.  If you are looking for term life insurance, (and you probably know I am a big proponent of life insurance, especially term life insurance) Accuquote is a good place to start investigating specific term life insurance policies.

There are pages written about how to buy term life insurance, but very few devoted to death benefit claims and payouts. Sadly, this topic is so neglected, that awareness levels on this matter are very low. Term life insurance is the best kind of life insurance available today, and it would be a shame if your beneficiaries do not know or are misled about payout procedures. This article
will help fill the gap and provide some insights into the types of term life insurance payouts.

The first step
When a loved one has expired and the funeral formalities are finished, you, the beneficiary needs to submit a certified copy of the death certificate to the insurance company. The death certificate is a must in order to file an insurance claim. Instead of contacting the insurance company, contact the agency or agent that sold the policy to the insured. Numbers of both the agent/agency and the life insurance company are usually found on the policy itself. The agent will help you understand the procedure better, and will ease the process for you in your time of grief.

Death benefit payout options
When your claim has been filed and approved, the life insurance company will ask you how you would like to receive the death benefit amount. There are two main payout options:

Lump Sum
Almost every term life insurance policy allows you to withdraw the entire death benefit amount in a lump sum. Most beneficiaries opt for this payout plan if there are pressing financial commitments like loan payments or an urgent need for the entire amount. Some beneficiaries prefer to withdraw the entire amount, and then direct it to tax-deferred investment vehicles.

Annuity Methods

For those who do not wish to receive the death benefit in a lump sum, life insurance companies offer several types of annuity (yearly) payout options depending on how you want to receive the amount. These include:

  1. Life income: The beneficiary is guaranteed an annual income as long as he or she lives. The insurance company determines the payment amounts based on the age and gender of the beneficiary. If the beneficiary dies, the insurance company retains the balance amount.
  2. Life income, period certain: The beneficiary is guaranteed an annual income for life, or a specified period of time, whichever is longer. If the beneficiary dies before the specified period, his or her beneficiary i.e. a second beneficiary receives the outstanding payments.
  3. Last survivor income: If there is more than one beneficiary, life payments will be made until the last surviving beneficiary dies.
  4. Specific Income: The beneficiary gets to choose how much and for how many years death benefits will be received, until the entire death benefit is exhausted. If the beneficiary dies before the last payment, his or her beneficiary receives the remaining payouts.
  5. Interest income: This is a great option for minor beneficiaries. The beneficiary is guaranteed payments on the interest paid on the death benefit for a specified time, or until the beneficiary reaches a certain age. The original benefit is then made available to the beneficiary.

Always think your options through

Before choosing a payout option, evaluate your financial needs to determine which option is best for you. It is always wise to speak to a financial advisor or a tax consultant. Though the payment options are relatively simple and easy to comprehend, it is wise to understand them thoroughly and know the implications of each kind of payout method. Beneficiaries must be aware that though the lump sum benefit is tax-free, all interest amounts received on the lump sum are taxable.

If you do not own a term life policy yet, the Internet is a great place to shop around and get free term life quotes. Just make sure that your beneficiaries are kept in the loop about the options available to them when claiming your death benefit.

Financial Peace University Lesson 7 – Clause and Effect

November 13, 2009 · Filed Under Financial Peace University · 4 Comments 

The Role of Insurance in your Financial Plan

This week’s lesson was about insurance – all kinds of insurance.  Ramsey  introduced the various types of insurance that he recommends for each person and also briefly touched on the types of insurance coverages to avoid.

The purpose of insurance is to transfer risk

Insurance is an essential financial planning tool as some types of losses can financially devastate you.  For instance, if your house burns down or you are permanently disabled, these are events that can be catastrophic to your financial well being.  The point of insurance then is to transfer these huge risks away from you and onto someone else.  Ramsey states, “I want them to catch the catastrophes.”  You can survive bills of a few thousand dollars if you have an emergency fund and good financial habits….the issue is the very rare but very large problems that your emergency fund won’t even come close to covering.

Types of Insurance that Ramsey Recommends

  1. Homeowner’s or Renter’s Insurance
  2. Auto Insurance
  3. Health Insurance
  4. Disability Insurance
  5. Long-Term Care Insurance
  6. Identity Theft Protection
  7. Life Insurance

Ramsey spent the majority of the lesson giving some information and tips on each insurance type.

Homeowner’s and Auto Insurance

The best way to lower your insurance premiums is to raise your deductible.  If you have a full emergency fund, then raising your deductible from $250 to $500 or even $1000 should save you a significant amount on your premiums.

He also recommends carrying adequate liability coverage (at least $500,000) or carrying an umbrella personal liability policy to protect your assets (if you have significant assets to protect, that is).

Health Insurance

Again, the key to reducing your premiums is to increase your deductible, coinsurance, or maximum out of pocket expense – but never decrease your maximum lifetime benefits.  Another option that Ramsey recommends is an Health Savings Account (“a really, really, really good idea”).  This is a tax-sheltered savings account that you never pay taxes on (going in or coming out) if you use it for medical expenses.  It is paired with a high-deductible insurance policy.  Depending on your situation (especially if you are healthy), you can save a lot of money using one of these policies.

Disability Insurance

Disability insurance replaces your income if you are unable to work.  The best type of disability insurance to buy (though it is usually more expensive) is occupational or “own-occ” insurance.  This means  your insurance payments will kick in if you can not perform the job you were educated to do.  He recommends you purchase coverage for 65% of your current income.  Remember, your income is your biggest asset so it is a really good idea to protect it!

Long-Term Care Insurance

LTC insurance pays for nursing home, assisted living facilities, of in-home care if you need it.  Ramsey states that 69% of people over the age of 65 will require long-term care at some point.  He recommends that everyone purchases LTC insurance on their 60th birthday (but not before).

Identity Theft Protection

The average victim of identity theft spends 600 hours cleaning up the mess (“you now have a new hobby”) so he recommends enrolling in a protection plan.  The plan you choose should include restoration services instead of just providing credit report monitoring.  (See the right sidebar for a link to save on LifeLock’s plan)

Life Insurance

Dave is a big proponent of life insurance – but not of cash value life insurance.  In fact, he spent the biggest part of the class explaining why cash value life insurance is a bad idea.  The most common life insurance myth, he states, is that you have a permanent need for life insurance.  Imagine this scenario: twenty years from now your children are grown up and out of the house, you are completely debt free including your 15 year mortgage, and your investments have grown to a considerable sum – you are now self-insured.  In this scenario, why do you need a big life insurance policy if you die?

Not only does he think that there is no permanent need for life insurance, he also points out that these life insurance policies are not a good way to invest.  The biggest reason is the myriad fees that are tacked onto them.  These high fees act to drastically reduce your long-term return.  If you are eligible, a Roth IRA is a much, much better way to invest your money.

To be fair, I have heard other arguments for purchasing permanent life insurance such as for estate planning reasons and as another tax-advantaged way to save money – but these are both for high net-worth people.  Ramsey did not touch on these reasons, possibly because they only apply to a small segment of the population.

Dave’s recommendations for purchasing life insurance:

  • Buy low-cost level term insurance – term is for a specified period of time and is substantially cheaper.
  • Insure your spouse – even if he/she is a stay-at-home spouse.
  • Stay away from fancy options such as accidental death, return of premium, waiver of premium.
  • Children only need enough for burial expenses – usually can be purchased inexpensively as a rider on your policy.
  • Purchase coverage of about 10 times your income

Insurance coverages to avoid

  1. Credit life and disability to pay off your loan if you die, they are generally extremely expensive compared to life insurance
  2. Credit card protection
  3. Cancer and hospital indemnity – health insurance should cover this
  4. Accidental death – stick to standard life insurance
  5. Any insurance with cash value, investments, or refund
  6. Pre-paid burial policies – pre-plan your burial and save up for it if you want, but don’t pay for it until it is time to pay for it.
  7. Mortgage life insurance – If you can’t get normal life insurance, then this might make sense; in general, though, it is decreasing term insurance that is about 10x too expensive.
  8. Any kind of duplicate coverage – for instance, having two health insurance policies will not ensure you have full coverage, in fact, you will end up with no coverage as the two companies fight over who is the “primary” insurer.

So, that was the lesson.  There was a lot of detail in this lesson, and a lot of railing against permanent life insurance!  Of course, it is not possible to provide enough detail on each individual type of insurance I mentioned in this post to be able to make an informed purchasing decision.  But take the list of recommended insurances as a starting point to evaluate your current coverages and see where you may need to do a little more risk transference.  Just remember to do some more indepth research before modifying or purchasing any policies.

Check out my previous FPU posts:

Why We Switched to Term Life Insurance

October 6, 2008 · Filed Under Insurance · Comment 

In a previous post, I mentioned that my wife and I had recently cashed in our variable adjustable life (VAL) policies and replaced them with term life insurance policies .  I’d like to take you through my thought process for deciding to take this step.

Term or Universal/Variable/Whole?

When I first started my journey to learning about personal finances, most of the books and advice I read suggested purchasing term life insurance policies and not to combine your investing and life insurance.  The main reason were the onerous costs and fees typically associated with the universal policies that tend to eat into your investment results (can I just refer to universal/variable/whole/etc as "universal?" – it’s a real pain to write them all out).  I also have a friend who is a financial planner and he told me that he has never recommended a universal policy for one of his clients.

The fees really are pretty crazy on these policies.  For instance, during the first year almost 100% of your premiums go toward…well, I don’t know where it goes but I do know that it does not go into your investing account.  After putting around $5000 into the account during the first year, I remember having a few hundred dollars in cash value!  During the last few months that I owned the policy, I reduced the premium amount to $50 and that sounds like a pretty good deal.  But after riders and fees, less than half of that actually made it into the investing portion of my policy.  You might say, not too bad – only $30 per month for insurance?  Well, sorta, this did not actually cover the cost of the coverage – each month they would take money from the cash value to fund the difference.  And these policies are terribly complicated: it took me more than a few phone calls to figure out where all the money was going.  At one point, the agent did not even know what some of the fees were – he had to check with the home office and call me back.

Do universal policies ever make sense?

To be fair, In limited situations and for specific purposes, it might make sense to use a universal policy.  The situation of which I am speaking applies to high-income earners who have maxed out their tax-advantaged investment options and still have more money to invest.  Universal policies are typically tax-deferred and present another opportunity for avoiding the tax bite.  Also, your universal policy usually affords some liability protection compared to a standard taxable investing account.  If this applies to you, it might work for you to over-fund a universal policy to take advantage of liability protection and tax-advantaged growth.  I certainly would not recommend doing what we did though – putting less into 401k accounts and Roth IRAs so we could fund an expensive life insurance policy.

Our experience with VAL

In 2001, my wife and I both purchased VAL policies on the advice of our financial planner at the time.  We owned these policies until 2007.  Of course, the investments started out rough during the early 2000’s but for the past few years, a pretty good bull market had been raging.  My wife paid the minimum amount in premiums while I overpaid to build up extra investing equity.

So the result when we investigated how much they worth if we cashed them in?  Well, let’s look at the bright side – at least I wouldn’t have to pay any taxes on the money.  That’s right, the cash value amount after six years of funding the policies, even through a bull market, was less than I had paid in premiums.  So, that pretty much sealed the deal for us.  Unfortunately, that left me with the nagging feeling that if we had purchased much less expensive term policies and invested the difference in a Roth IRA we would be a lot better off now (my wife has repeatedly urged me not to dwell on this). 

So we decided to investigate term policies

Previously, I discussed the process that we used to investigate and purchase term life insurance policies .   Well, we followed that process and ended up with much more insurance with guaranteed premiums for 20 years at a much lower cost (basically I now pay yearly for 2x the coverage what I used to pay for 2 months).

Do something constructive with the extra money

If you replace a universal policy, you may have a chunk of cash when you cancel your policy and you will probably have a monthly savings as a result of paying lower premiums. Don’t just squander this money.  Even if the fees are high on the universal policy, it does act as forced savings.  You would have been better off keeping the universal policy than just blowing the premium savings each month.

Personally, we used the cash value of our old policies to pay down some of our student loans.  Then we used the monthly savings to accelerate the remaining loan.  These two factors were actually a big part of us finally getting out of debt except for the mortgage .

Do not cancel your current policy before the replacement is in effect

That’s the most important item to remember when replacing life insurance.  In my next post I will expound on the topics that should be considered when deciding whether or not to replace a life insurance policy – please check back.  This one is so important, however, that I have to point it out here and now.  Let me repeat: even if your policy is super expensive, do not cancel it until your new policy is fully in effect.

Parting questions…

Has anyone else switched from universal to term?  Were you able to be good about using the monthly savings constructively?  Has anyone gone the other way?  I would be very interested to hear the reasons for that switch.

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