Life Insurance Cost

2010 was a much improved year for America’s insurance industry after suffering through 2009, which was a terrible year.  During the last few years, write offs in the insurance industry occurred in record amounts.  Overall this helped to push insurance rates down.  Tough competition and company consolidations were also prevalent, which helps reduce rates as well across the board in order to attract and keep customers.  It appears at this point that the worst is behind us.  Over the next several years consumers can expect to see life insurance rates rise along with other costs.

Unfortunately during tough economic times life insurance is considered a luxury that many people will go without.  With the economy stabilizing in recent times, many people have renewed their life insurance.  This corresponds with life insurance rates rising over the next several years.

A number of big life insurance companies invested in the real estate financial market and suffered large losses.  Many of these life insurance companies had to rely on bail out packages from the government when the economy was at its worst.  However many of the companies have repaid as well.  The stabilization of the country and insurance companies eventually will make its way to consumers and result in life insurance rates that are higher.  Many experts think life insurance rates could start in increasing in late 2010.  some analysts think insurance companies won’t adjust their life insurance rates until they see how the health reform changes that have recently been passed will affect consumers, which could delay substantial increases from occurring until 2014.

We received this question from one of our readers.  I am 33 years old and make approximately $150,000 per year.  I need to plan for my retirement, and I’m starting from scratch.  Someone who is close to me would like to sell me a life insurance policy that features a cash value as a way for me to save.  Is this my best option?

Well my first question is what to you mean by someone close to you?  Are you talking about a co-worker, acquaintance, friend or relative?  Whoever this person is, my first suggestion is that you distance yourself, at least in terms of your finances, with this person.

The reason for this is because when you are trying to save and invest for your retirement, your starting point shouldn’t be life insurance.  In terms of your options, life insurance should be way down on your priority list, if at all.

That doesn’t mean life insurance is unnecessary.  If there are people in your life depending on your income such as children, a wife, or other family members, you need to ensure that in the event that you should die an untimely death that they will be well taken care of.

However the kind of policy for providing that kind of assurance is term life insurance.  You pay a premium annually and an insurance company promises they will pay your beneficiary a death benefit in the event of your death.  A term life insurance policy is ideal when it comes to basic insurance protection because it gives you a big bang for your bucks or the most in death benefits for the amount you pay in premiums.  This frees up more money to do other things such as save for your retirement.

When you have life insurance with cash value, by contrast, only part of the premium will go toward paying for the death benefit, with the rest going into the investment or cash value part of the policy.  Depending on what kind of cash value type policy, could be something close to having a savings account where you receive interest to a more mutual fund-like investment.

This approach, the way I see it, does have several drawbacks.  Because only a portion of your money is going towards the death benefit more money will need to be shelled out in order to get an equivalent benefit that you would get with term life insurance.  Expenses associated with investing via life insurance tend to also be higher than costs paid for retirement investments not involving a life insurance policy. Generally higher costs result in lower returns.

Also, hybrid investment-insurance policies tend to be hard to assess and complicated.  Finally, the tax advantages that often highly tour about  these types of investments is often overstated in my opinion.

If life insurance is not the best solution, what’s the best way to get started on saving for your retirement?

Fortunately, several retirement investment and saving vehicles are available that offer tax benefits that are more straightforward, and more convenient and more cost-effective as well.

If you have a retirement savings plan through work, like a 401(k) that should be a top priority.  401(k) plans offer sever important advantages.  First there is the federal contribution ceilings which are relatively generous- $16,500 and for people who are 50 years or older an additional $5,500 (although lower limits can be set by specific plans).  Also, your pre-tax dollars along with the investment earnings generated, will not be taxed until they are withdrawn.  Many employers offer matching funds.  The typical amount is fifty cents for every dollar you contribute from 6% of your salary.  It basically amounts to you getting paid an extra amount to save for your retirement.

If you don’t have a 401(k) plan available to you, or you have contributed the maximum but still can save more, a ROTH IRA or traditional IRA is something you may want to consider.  They do have lower contribution limits: $5,000 per year and for those older than 50 an additional $1,000.  However if you do meet the eligibility requirements, an IRA can be a great way of building up a nest egg for retirement, particularly if you get an early start while you are still young, make maximum contributions over many years, and also stick with low cost investments.

If you happen to exhaust all of these possibilities you can then move into tax-efficient investments that are part of taxable accounts, like tax-managed funds, ETFs and index funds.

One final thing when it comes to your life insurance policy.  Be sure that your beneficiaries will be prepared for dealing with the payout on your policy upon your death.

This is always wise.  However it’s even more relevant currently given that the attorney general from New York State last week announced his office will be conducting an investigation of the industry industry to determine whether or not beneficiaries on policies for nonmilitary federal employees and military members have been put at a disadvantage by having their death benefit proceeds put into low yielding accounts.

At this point is isn’t clear whether or not insurers have done anything that is actually wrong.  However no matter what the outcome is eventually from this investigation, the broader lesson for now at least is making sure your beneficiaries know how to properly handle insurance policy proceeds, particularly since the amount of money is more than what many people ever see in their entire lives, in order to make sure they will be able to maximize any benefits they receive from a payout.