But I think this is a situation where it’s important to consider your own specific situation rather than just the generic advice that is given to people in your demographic (people with children, people without children, single parents, etc.).  Before you dismiss the idea of a term life insurance policy simply because you don’t have any children, consider the other possible uses for the policy.

For starters, term life insurance for a healthy person is a very inexpensive purchase, especially when compared with the other types of insurance that we can buy (disability, health, auto, etc.).  And the younger and healthier you are when you buy it, the less expensive it is.  So although you might not have children yet, if you’re planning to have them a few years down the road you might want to get a term life insurance policy in place sooner rather than later.  You can opt for a 30 year term in order to cover your potential child’s entire childhood, even if that child isn’t born for several more years.

Another thing to consider is that a term life insurance policy can be used to provide for a surviving spouse or partner, even if that person has their own source of income.  If you’re in a long-term relationship where you both work and contribute financially to the household, what would the sudden loss of your income mean for your partner?  Would he or she have to sell your shared home because his or her income alone would no longer be enough to cover the mortgage?  The surviving partner might indeed decide to sell and relocate or downsize, but it’s nice to be able to do that on one’s own terms rather than being forced to sell quickly because there isn’t enough money to cover the current living expenses.

In addition to covering expenses until the surviving partner is able to downsize his or her life to match his or her solo income, a small life insurance policy might allow the surviving partner to take some time off work to grieve and come to terms with the loss without having to worry about paying the bills right away.

If you don’t have children, your need for basic life insurance is going to be considerably less than it would be if you did have children.  But a small term policy might be the perfect way to provide a cushion for an adult who relies on you emotionally and/or financially, even if that person is technically capable of supporting him or herself entirely.  Life insurance is about peace of mind and creating the sort of life you would like for those who are left behind.  With no life insurance proceeds, a surviving spouse might have to struggle to make ends meet, sell the house, or work extra hours during an emotionally wrenching time in order to pay the bills.  A small life insurance policy could be the thing that makes the financial aspect of the whole situation easier to bear.

To start things off, we have a compelling article from Scott Bartlett about the dangers of progress.  Scott’s post is inspired by the book A Short History Of Progress by Ronald Wright.  It’s a reminder of the ultimate risk to all of us if we don’t take care of this little planet we all call home.  But more then the usual articles about climate change and environmental degredation, Scott also looks back over centuries of history to see how the rise and fall of civilizations is often linked to resources and their depletion.  Sobering, yet an excellent read.

To put a visual spin on the idea of risk, Julie Ferguson of Workers’ Comp Insider brings us a photographic depiction of workers performing all sorts of tasks far from terra firma.  If you’re leery of heights, these are probably not the jobs for you.  There are pictures of modern workers, as well as plenty from days gone by, and it’s interesting to note the complete lack of safety equipment in some of the older shots.

Life Insurance And Estate Planning

Jim Yih of Retire Happy Blog brings us Cathy’s story of life insurance.  It’s an excellent example of a scenario where term life insurance makes much more sense than permanent life insurance.  Term life insurance is a perfect product for someone who is insuring her life in order to protect her children, since we can assume our children will only be financially dependent on us for a finite length of time.  And since it’s a lot less expensive than universal or whole life insurance, a term policy allows a person to have a policy with a higher face value and lower premiums.

Free Money Finance also writes about term life insurance, taking to task a recent WalletPop article that included term life insurance as a type of coverage that is “not worth the money”.  I think FMF’s take on this is absolutely correct.  For some people, permanent life insurance might be just the right product.  But anytime a planner or advisor is recommending permanent life insurance as being generally a better option, it’s a good idea to question how much more commission they will get if the client goes with permanent life insurance.

Continuing on the importance of estate planning, Jeff Rose of Good Financial Sense tells us what happens if you die without a will.  Basically, all assets will pass through probate, and state laws will determine how your money and possessions are doled out – and who will care for your minor children.  The way the state does it may be far different from how you would want it done, which is why having a will is such an important part of financial planning.

Russell Hutchinson of Chatswood Consulting Limited takes a look at whether the Christchurch, New Zealand earthquake will impact life insurance premiums.  He notes that although the loss of life was tragic, the payouts in terms of life insurance settlements will be quite small when compared with the payouts for property damages from the quake.  He concludes that events like the recent earthquake will usually not impact life insurance premiums rates at all.

Health Insurance And Healthcare Reform

Jaan Sidorov of the Disease Management Care Blog delves into some of the financial nitty gritty behind the idea of patient centered medical homes.  The PCMH concept has become quite popular during the course of the healthcare reform debates, but Dr. Sidorov’s article brings into question the financial sustainability of such models, as it appears that they won’t be making much money.  The idea is for the clinics to be paid on a per member per month basis, but the actual amounts that would likely be paid are startlingly small.

InsureBlog’s Bob Vineyard tells us about a European ruling which prohibits companies from using gender in setting prices for products like insurance and annuities.  Turns out that there could be some unintended (and not-so-great) consequences, such a young men buying higher performance cars because their auto insurance premiums are artificially reduced.  Here in Colorado, health insurance premiums are no longer allowed to be based on gender.  It will be interesting to see if similar laws catch on across the country, or with regards to other products, like auto insurance.

Jason Shafrin of the Healthcare Economist looks at a proposal from the Healthy Trucking Association of America and the Convenient Care Association, for a plan to provide health insurance to truck drivers that would allow them to access care wherever their job may take them.  The integrated medical home concept works well for people who are generally in the same geographic location from one day to the next – but truck drivers need access to care all over the country.

Eric Turkewitz of the Terkewitz Law Firm writes and open letter to NY lawmakers, encouraging them to reject a proposed measure that would cap pain and suffering damages at $250,000 in medical malpractice lawsuits.  While we tend to hear a lot from people who are in favor of tort reform measures like the cap on non-economic damages, Eric’s letter provides quite a bit of detail from the other side, and explains why it would do more harm than good to place such a cap.

The Consumer Boomer gives us an overview of how Medicare Advantage programs work, the details about what the various Medicare plans cover, and information needed for enrollment.  Good info for anyone approaching retirement age and starting to look at how health insurance works once we turn 65.

P&C Insurance

Nancy Germond of All Business explains why your home may be underinsured.  The problem seems to stem from the fact that many insurance carriers give the homeowner the responsibility of determining the replacement value of a home, and that may not be the same as the market value of the house.  Nancy notes that a better option is an insurance carrier that will do an independent appraisal, or one that will add a percentage cushion to the determined replacement value in order to more adequately account for increases in replacement cost.

Neal from Wealth Pilgrim explains that if you need to file a claim with your homeowner’s insurance, hiring a private insurance adjuster can be a good way to make sure that you get as much money as you’ll actually need to repair or rebuild your home.

Canadian Finance Blog explains the basics in terms of how auto insurance premiums are calculated:  type of coverage, how much you drive, what kind of car you drive – they all play a factor.  I’ve read that some auto insurance carriers even look at credit scores in order to set prices.

Other Risky Business

Health Blog’s David Williams discusses whether parents should be allowed to give teachers gifts.  While regulating such things might at first seem trivial and intrusive, David points out how gifts from pharmaceutical companies to doctors have been shown to influence the doctors’ prescribing habits.  Observation of the relationships between doctors and pharmaceutical companies when gifts are involved should give us pause to consider the fact that there is always a risk of compromising integrity when gifts are allowed.  Good food for thought.

The Dough Roller tells us about identity scores.  I wasn’t aware such a thing existed, but an identity score – compiled using data from a much wider source of data than credit scores -  is used by lenders as an indicator of how likely it is that a credit applicant is using a fake identity.  The higher the number, the more likely it is that an applicant is committing identity theft.  The article includes details about how you can check your ID score and make sure that it doesn’t contain errors.

Credit Card Guru takes us for a closer look at payment protection insurance, and concludes that it’s usually not worth the money.  Sure, programs like that help to alleviate some risk (for people who carry a balance on their credit cards and would have a hard time making payments if they were faced with an unexpected job loss, illness, etc.) but it appears that the insurance is pricey and has a lot of fine print.

Heather Hollingsworth takes a look at how unrest in Egypt and the rest of the Middle East could impact global financial recovery from the recession.  Since so much of the world’s oil comes from the Middle East, protests and regime changes there can have an effect all over the world.

That wraps up this edition of the Cavalcade of Risk.  Thanks for all the great submissions!

For some people with more complex financial situations (such as a family business that they would like to leave to their heirs, for example), permanent life insurance may be a more appropriate choice.  But such policies are much more expensive than term life insurance, and tend to be more complicated too.  For people who really only have a genuine need for the protection offered by term life insurance, the investment benefits associated with permanent life insurance can usually be obtained in a more straightforward manner by simply investing the additional premiums that would have been needed to purchase permanent life insurance.

Although permanent life insurance products can be a useful tool for some clients, purchasing them might not be truly the best financial move for many people who might be better served by a basic term life insurance policy and a separate investment program to accumulate money for later in life and/or to pass on to heirs.  However, the commissions for agents who sell permanent life insurance is significantly higher than the commissions for term life insurance policies, in part because the policies themselves are so much more expensive.  This can potentially create a conflict of interest if a client is taking policy recommendations from an agent who will receive the commission for whatever policy is ultimately purchased.

In a reminder that Universal Life insurance (a form of permanent life insurance) premiums are not fixed, a recent class action lawsuit in CA ended with a federal judge ruling that Conseco Life Insurance Co. cannot triple premiums for 50,000 policy holders who have had their policies since the late 80s and early 90s.  The courts got involved because the proposed premium increases were so significant, but the complexities of universal life insurance include a lot of flexibility in terms of premiums.  If interest rates drop (as was the case for people who bought policies in the 80s, when interest rates were much higher than they are today), future premiums can increase significantly.  Although the court has ruled that Conseco cannot triple the premiums for those policy holders, there’s no set limit for how much premiums can increase.  Older policy holders who have had their coverage for decades can find themselves unable to keep their policy in force if premiums rise beyond what they can afford.

Anyone in the market for a life insurance policy should be well aware of the differences between term life insurance and permanent life insurance, and should understand the long term implications of each type of coverage before selecting the best option for their particular situation.

Whole life, universal life, and variable universal life are all being purchased more this year than last year.  But term life insurance did not show gains; annualized premiums for term policies dropped 11% in the second quarter of 2010.  I find this interesting, given that term life insurance tends to be the most appropriate choice for the majority of the population that needs to secure death benefits.

It’s possible that the slowly-rebounding economy is responsible for the shift from term to permanent life insurance products, and for the overall upswing in total annualized premiums.  For the last couple years, the recession has meant that most of the country has been tightening their budgets.  Term life insurance policies are a lot less expensive than permanent policies, so for people who needed to buy life insurance during the recession, term products were likely more popular.  But now that the economy is showing signs of recovering, people may be more apt to purchase higher-cost permanent life insurance policies that grow cash value or include an investment component.  It will be interesting to see how the numbers play out for the rest of 2010… will term life insurance policy sales bounce back, or will the growth of permanent policies continue?

Certified financial planner Carl Richards had a great article on the New York Times blog last month, about why life insurance shouldn’t be treated as an investment.  The napkin drawing is chuckle-worthy, but it also makes a really good point:  for most people, it’s a better idea to keep investing and life insurance as separate entities.  There are exceptions, such as people who need to generate cash upon their death to pay estate taxes on assets like real estate or a business that they would like to pass to their heirs without selling.  For situations like that, the financial obligation won’t diminish over time and the life insurance policy needs to be permanent.  But for most people, the need for life insurance does indeed diminish over time as children finish college and mortgages get paid off and net worth grows.  For many people, the need for life insurance after retirement is low, as there is no longer an earned income that would need to be replaced.

For people who still have many years of work ahead of them – and many years of financial obligations – now is a great time to look into securing life insurance.  A term life insurance policy will allow you to lock in the premium based on your current age, and is a great way to protect your family’s financial future without taking financial risks.

1.  It might be more coverage than you need… or at least coverage for longer than you need.  Because permanent life insurance is so much more expensive than term life insurance, people might get a lower face value than they really need, but end up with life insurance long after their children are grown and the house is paid off.  It usually makes more sense to purchase a less expensive, higher face value term policy, which will truly provide financial protection to your family while they need it – ie, while children are young, college still has to be funded, and payments are still being made on the house.

2.  It may not be your best investment.  The idea with permanent life insurance is that it provides a death benefit, but also builds cash value via investments.  But for most people, it makes more sense to purchase insurance separately from investments.  It’s hard to tell where your money is being invested in a permanent life insurance policy.

3.  But in rare cases, it’s just the ticket.  I would say that these are very rare cases, but they do happen.

4.  The right flavor makes all the difference.  Deciding among the three types of permanent life insurance policies (universal, variable, and whole) will likely require extensive research and/or a meeting with a financial advisor.

5.  Dumping a policy will cost you.  It takes many years for the cash value in permanent life insurance policies to build up to a significant amount of money.  If you cancel a term policy early, you’ve only paid for the life insurance protection you got during the years you had the policy.  But if you cancel a permanent policy in the first 10 or 15 years, you will likely have paid a lot of money (above and beyond what you would have paid for just having the death benefit of a term policy) and get very little in return.  A permanent policy is really only appropriate if you know that you’ll stick with the policy for the long term.

Permanent life insurance is a good option for some people.  But if you choose to purchase it, make sure that your decision is based on independent research or advice from a qualified professional who does not have a vested interest in your decision.  The premiums – and thus the commissions – are significantly higher on permanent life insurance policies; if the person advising you to opt for a permanent policy is also making a commission based on the policy you buy, you might want to get a second opinion.

If you have life insurance through your employer, be sure you know how much coverage it provides and how far that would go.  If you need to add additional life insurance coverage, a basic term policy of 20 or 30 years will probably do the trick.  Premiums are based on age at issue, so the younger you are when you get your policy, the less you’ll pay for the life of the policy.  And since life insurance policies are medically underwritten, the healthier you are, the better rate you’ll get.  The time to make sure that your family is protected is today.

As an example, if you’re a very healthy 35 year old, you’ll probably find it relatively easy and inexpensive to secure several hundred thousand dollars worth of term life insurance.  But if one of your hobbies is rock climbing, the premium on the life insurance policy can easily be tripled or quadrupled by most carriers.  The standard underwriting action in a case like this is to bump the rate from “preferred best” to “preferred” and then to add an additional annual amount ($2 – $2.50, for example) for every thousand dollars in life insurance coverage.  So a half million dollar policy can easily increase in premium by more than $1000/year if the applicant participates in “risky” activities.

However, underwriting does vary from one insurance carrier to another, and some are more lenient than others for specific activities and health conditions.  If you’ve applied for a life insurance policy in Colorado and received a rate increase because of health or lifestyle, there may be other options that would allow you to purchase the same amount of insurance for a lower premium.  We can compare options for you and help you find the best value for your insurance dollars, and there is never a charge for our services.

Determining whether return of premium life insurance is a good choice depends a lot on your own habits, goals, and tolerance for risk. Let’s consider a hypothetical situation of a 35 year old female who is looking for a $1 million, 30 year term policy. Let’s say she can purchase a traditional term policy for $650/year, or a return of premium policy for $1175/year.

If she buys the traditional term policy, she will spend $19,500 on the coverage over the course of 30 years ($650 x 30). This money is gone forever, but it has done its job of purchasing peace of mind for her and her family.

If she buys the return of premium policy, she will spend $35,250 on the coverage ($1175 x 30), but if she is alive at the end of the 30 year term, she will get the entire amount back. This option costs a total of $15,750 more than the traditional term policy, so the trade off between the two policies is what she could have done with that money if she had purchased the traditional policy instead.

Here’s where an investment calculator comes in handy. The return of premium policy will cost $525 more per year than the traditional term policy. We can use an investment calculator to determine what sort of return she would have to get on that money if she invested it on her own, in order to end up with at least a total of $35,250 at the end of 30 years (since that’s the amount she will end up with if she buys the return of premium policy).

There are numerous online investment calculators that you can use. Each person’s situation will be different in terms of taxes (ie, one person might choose to invest the difference between the premiums in a traditional IRA, with tax-deferred growth, while another person might put the money into a taxable brokerage account) so I’m focusing solely on the growth of the money without taking taxes into consideration. Here is an example of a simple calculator that you can use to determine the effective rate of return that the return of premium policy is giving you.  For our hypothetical lady, we can input 30 years, an initial principal of zero dollars, and an annual investment of $525.  We can reduce the tax rate to 0%, but if she is investing her money in a taxable account, that amount will have to be increased.  Then we can move the little blue arrow on the rate of return line until the investment total (in blue at the top of the calculator) gets to at least $35,250.  For our lady, this happens at 4.8%, at which point, her investment would be worth $35,324 after 30 years (if she invested her money in a taxable account, her rate of return would have to be higher to offset the loss to taxes).

So if this lady were to get average returns of more than 4.8% in another investment vehicle, she would be better off getting the traditional term policy.  But if she likes the idea of a guaranteed rate of return and forced savings, she might be better off with the return of premium policy.  The final decision will be up to you, but understanding the numbers behind the premiums will likely make the decision easier.