According to the Investment Company of America 32% of Americans have neither an IRA nor a retirement plan at work. Will these workers still want to retire one day? If so, how? They can start an IRA for as little as $50/month, and something is better than nothing! If you have not started an IRA, and do not have a plan at work, contact us on our website: http://www.farmersagent.com/ctrowbridge , or call me at 650-FARMERS!
While this Title phrase may sound dramatic, it very simply sums up the very purpose of Life Insurance and what it will do for your family. Life Insurance clearly does not replace your goal of building your financial security through investments, but should be viewed as a starting point in that effort. Years ago, when I was first introduced to the Financial Planning Pyramid, (a pyramid graphic depicting the hierarchy of your financial priorities in building financial security) the very base of that Pyramid was labeled your “Life and Disability Insurance”. The logical reasoning for this was that you first have to protect what you have, and build from there! Your family’s Financial Future will be seriously impeded, if not destroyed, if one of the adult members of the household were to die unexpectedly.
Once you realize the importance of having this protection, you then have to decide how much is appropriate, and just as important, affordable. In today’s world the ideal is having a policy large enough to conservatively replace the major breadwinner’s financial contribution to the family. And, let’s not forget about a non working spouse’s financial contribution to the household which has been conservatively estimated at @$35,000 per year. The amount of mortgage debt, and the cost of the children(s) college education are other items considered vital to the amount of coverage.
Among the two types of Life Insurance available (temporary or permanent) the least expensive is Term (temporary) coverage. When your children are minors (up to age 18) and/or the mortgage debt is large (for new homeowners), Term is an economical tool to provide the larger protection you need during these years. However, 98% of Term is not in force when it’s needed, as most live through the term, allow it to lapse, or cancel it when times are tight. Term is also not as available in your later years as the cheaper premiums do not offset the mortality risk to the insurance companies. Then you will need to consider a permanent policy (Whole Life, Universal or Variable Universal). If possible you want to buy this as young, and inexpensive as possible.
When weighing the amount needed against the amount affordable, I always start with the premise that something is better than nothing! You should consider what the family can afford, on a monthly basis, and work from there. If there is Group Life coverage available at work it is an excellent option to augment that which you can afford personally. But, if you leave that job, in most cases you can’t take it with you, and it is usually not more than 1 or 2 X salary. So it alone is not enough, particularly in California, to provide for your family’s security.
I have come across some who do not “believe” they need Life Insurance because they have plenty of assets to protect the family should a parent die. This may well be, but if one has the assets to protect their family, and can easily afford to provide the means for the funeral for one of such status, wouldn’t it be a better use of those assets to provide a Life Insurance benefit to cover the funeral expenses (at pennies on the dollar), than require the family to use them for their farewell services. If your finances are sufficient, consider buying, as soon as possible, a small permanent policy to bury you, and make up the balance of what you need with term coverage while your need is greater (see above-young children and mortgage).
If you don’t have dependents, you do not need Life Insurance (unless you want to leave something for your family to bury you). However, if you are single, you should look at Long Term Disability Insurance, and if you are age 50+ you need to consider Long Term Care Insurance, as you will be only one responsible for yourself! Your first step should be to talk to an insurance professional, to see what is affordable and appropriate for yourself, and your family. Do not let excuses and discomfort dissuade you from obtaining this vital protection for your family. The longer you wait the more expensive it becomes!
Corrin Trowbridge is a Farmers Insurance agent and can be reached at 650-FARMERS, or ctrowbridge@farmeragent.com. For a free quote contact us on our website: http://www.farmersagent.com/ctrowbridge
4/9/2012:
What is the best kind of Life Insurance?
As in many areas of insurance, the answer to this question is: “It depends!”. There are a number of factors that go into your need for, and cost of Life Insurance. First, Life Insurance is used mainly as protection for others from the financial loss that would come with the death of the insured. While no one likes to dwell on the death of family, or other important people in your life, it is a reality and one you should takes steps to lessen the risk of financial loss from it. Life Insurance can also be used to settle an estate, by offsetting taxes, or create a legacy if the beneficiary is a non profit.
As mentoned above, there are two primary types of Life Insurance : Term, or temporary, and Permanent. The main differences are that Term is only for a term of years, and only pays a death benefit, while Permanent is with you until you die, and builds a cash value in your “seperate account’. There are different types of permanent insurance that treat that cash value differenty and make it more or less expensive.
The variety of features make these two differnt policies better for different situations, but truth be told, if it is econmically affordable, the best choice would be a combination of the two, a smaller permanent policy (bought as soon as possible as it only gets mroe expensive with age), and a term policy (to make up the difference with what you need at your highest need). That is because the permanent assures there will be something available to take care of your final expenses, and term allows you to buy to the larger amounts one needs to truly protect their families financial future when needed. If that is not financially realistic then one has to make a trade off, and assume the risks that come without having one, or the other.
Your need for life insurance would look like a bell curve if it were charted on a graph. Its starts out small when you are young, , but then you get married, buy a house, have children and it rises to a peak, gradually reducing when the children grow older and leave the household, and the mortgage gets paid off. That is one of the reasons buying a small permanent policy as soon as possible, preferably before age 25, is a good idea as it keeps that cost to a minimum for your life time!
One of my favorite sayings is: We don’t plan to fail, we fail to plan!
In conclusion: I will repeat myself. “Something is better than nothing,” so don’t think that if you can’t afford enough to fully protect those you want to, its a basis for doing nothing!
HEY YOU, SNAP OUT OF IT! I can see your eyes glazing over and you stifling a yawn! BUT, this is a necessary expense, and if you DON’T HAVE ENOUGH COVERAGE AND REALLY NEED YOUR INSURANCE THAT CAN REALLY COME BACK TO BITE YOU! SO WAKE UP, AND PAY ATTENTION! As many of my clients have heard me say, “Insurance is a necessary expense until you need it, then it is a godsend!” But, what I want to share with you here is how to get the most from this necessary expense. That is, how to get the best value for the money you have to spend on it.
First, Let’s look at your Homeowners Insurance! It is designed for, and is best used as, protection from a “sudden and catastrophic” financial loss. It will prove very costly if you use it as a maintenance policy. That is because, and this is the dirty little secret about insurance, generally, when you use it for anything except a “sudden catastrophic financial loss” your policy will be “rated” up for the next three years and your premium will increase! If you use it again, for a loss that is less than catastrophic (maintenance loss) , it will be rated up even more, and suddenly will be an even more severe financial burden on your budget. The definition of catastrophic here is if the house burns down, versus your kid shifts into drive, instead of reverse, and plows into the kitchen from the garage.
Generally, you want to make sure your dwelling coverage is enough to replace your home if it were a total loss. Insurance companies used to offer “Guaranteed replacement”, but since the Oakland Hills fires in the early 90’s (when they discovered many policies did not carry sufficient coverage to replace the burned down homes) they only offer “Extended Replacement” coverage. The onus (read “responsibility”) is on the policy holder to determine how much is needed to rebuild your home. Then the Carrier offers a fixed , or percentage amount over that Coverage to “take care of any discrepancies” (the Extended Replacement coverage). The best way to determine what is sufficient coverage for your policy is to ask several builders in your area what a good approximate cost per square foot ($/p.s.f) would be to use as a guide. For instance, we have seen $300/p.s.f. here in the Bay Area for a 1950’s ranch home, to over $500 p.s.f. for a Victorian in San Francisco. For homes above 10,000 square feet I have heard of construction costs of $800-$1000 per square foot! Also, remember that quality of construction can have a profound effect on the replacement cost. Even with the financial uncertainty of the past few years reconstruction costs have not reduced much. If you take that $/p.s.f. and multiply it by the square feet of your home you have a good approximation of what sufficient Dwelling coverage should be for your policy.
Your Dwelling coverage is the main coverage in your Homeowners policy. The ancillary coverage’s of Separate Structures, Personal Property and Loss of Use are usually a percentage of that amount and are included in your policy. If they are separate you can simply quantify how much it would cost to replace those assets. Your Liability coverage is generally less expensive, because hopefully you will not have anyone over who would sue you, so make sure you have enough to cover all your assets, (including equity in real property, savings and investments and what can be your largest asset, your income). For good reason (I can get into in greater detail in person), we believe that Liability coverage amounts sufficient to protect your income, alone should be 4 X the annual income of the highest earner in the household. This figure, added to your Equity and Savings and investments, may add up to more than the $1,000,000 maximum that is offered in many Homeowners policies, so look to adding an Umbrella Policy that will provide additional Liability protection over your property and auto policies.
You face most of your Liability exposure in your Autos so it is extremely important to maintain adequate coverage there! If you own a home you need at least $250,000 per person, $500,000 per accident, and then consider an Umbrella over and above that all.
OK, so assuming you now have sufficient coverage to protect you from a catastrophic loss, how can we make it more affordable! That is where your deductible comes in! The higher the deductible the lower the premium! And since you do not want to use it for the small losses (which again, I can explain in person) you want to maintain a deductible which recognizes that you are willing to self insure the smaller losses and use your insurance as efficiently as possible for the larger “catastrophic” losses. For a home you want to have no less than $1000. I have $5000 on my home, knowing that if my bike is stolen out of the garage that will be my burden, but again, using it for its intended purpose, not as a maintenance policy.
For your auto’s I use $500 for comprehensive, and $1000 for collision. Remember, Collision deductibles mainly come into play when you are fault in an accident, and if you are at fault I would be more concerned with my Liability exposure, than how much I have to come out-of-pocket to fix the car. And in today’s Litigious society sufficient Liability coverage is imperative!
Many Homeonwer Policies have sub limits for “theft’ as things like cash, jewelery, silverware, guns, and fine arts, can somehow disappear. Talk ot your broker/agent about this and if you have valuable pieces of jewelry, or paintings, or things that can get up and walk away, you should consider a “Rider” that will protect you from any cause of loss, anywhere in the world, for an amount supported by an appraisal.
The most common Cause of Loss for Homeowners is from water damage. But, while damages from water can be covered, if you do not maintain your roof, or stop leaking pipes before they burst, you could get part of, or all your claim denied. Insurance is not a maintenance policy, so keep up with your properties wear and tear, and do not use it for smaller claims or your policy will be rated up and you may end up paying back anything you think you are saving by using it for small claims. See if your carrier offers Main Line coverage also which can provide funds to replace your main drain to the street for a nominal charge. Many Homes in the Bay area were built in the 1950’s with drains made of clay material, that have a 50 year useful life and today they are in the end of their usefulness and can crack or get blocked easily. This Main Line coverage can offer $10,000 to replace them for @$25.
I wil continue to add to this in the days ahead….
One of the primary issues of the day is health insurance! It was/is either too expensive, or not available to everyone, or both, and the government “needed” to get involved and correct the inequity. It is now deemed, by some, as a “Right”, similar to the other “Rights” enumerated in the constitution. While I have no quibble with those that point out the flaws in the current healthcare system, I do differ with some as to the practical remedy to those problems! The idea that the government is going to come in and make things better is not always a bad idea, but when government overreaches we sow the seeds for increased disfunction, an increase in costs and a reduction in goods and services. Sadly, many Carriers do not have a clue in public relations, and in the face of these regulatory threats they come out with seemingly obsene double digit rate increases! Not very conducive to gaining supporters. So where do we go from here?
Being an insurance agent, it distressed me to bring a family to a carrier as their COBRA was running out, and have the carrier say “Well, we’ll take the husband and child, but we decline to cover the wife!” There is something hypocritical in that fact that we can get around this by creating a small “Group” and get them all covered with no medical underwriting, even if it is a little more expensive. The carriers confuse the issue, and are inviting increased regulation, when they cold heartedly refuse to cover a family member, but will do so if applied for as a Group. What the carriers should consider is eliminate medical underwriting, and offer an open ended Group concept for the buying public. The Group concept is to be based on the idea that the losses on the few will be more than offset by the contributions of the many.
In the same vein, I am currently working with a Third Party Administrator (TPA) who doesn’t sell insurance, but administers group plans for businesses and organizations. Their value statement, if you will, is that they have actuarially determined the basis for a strategy that is allowing their customers to maintain their benefits while saving a substantial amount of money on their premium! This strategy is based on their determining that, over their 14 years in existence and over 3000 cusotmers, they see that only a small portion (4-7%) of employees are “heavy utilizers”, or the ones that will max out their deductible in a given year. And, 50-70% of employees do not use their health insurance, or use it so little it will not reaach their deductible.
The strategy uses high deductible plans to save 50% off the premium of a traditional plan (ie $500 deductible or $10-$50 CoPay plans). It is with those savings that we pay for the actual deductibles used, out of a company/organzation owned savings account, and after a small fee to the TPA for their service, results in a net 30% savings to the business or oganization. We are a lot healthier than we think as most of the focus of the press is on those who really need insurance and can’t afford any, or can’t get it offered to them by the carriers.
(Note-this strategy works best with a 5+ person group. Sole props and smaller groups, depending on their health, may want to use the strategy but with a personal HSA (Health Savings Account). They can use contributions to this account to pay qualified deductible expenses and write those costs off.)
This strategy is working for every group cleint I have (from 9 to -67 employees), and the TPA claims to have a 95% renewal rate. That tells me, in this market, where your policy is shopped every renewal because of the onerous rate increases, its not so much WHO you pay, but HOW you pay that delivers real savings! This “Partial Self Funding” approach is not only backed up by our experience, it is supported in the fact that very large employee groups (over 200 employees) save substantial amounts by self insuring themselves, and contract with a carrier to manage the plan, and cover any losses over a cetrtain amount (kind of a stop loss that limits the companies total exposure).
Companies have faced three choices too date; 1) accept the rate increases and hurt the bottom line, 2) ask your employees to kick in more to stem the pain of the increases, or reduce or eliminate benefits altogether. None of these are attractive choices! With this strategy companies can maintain the benefits their employees enjoy (and even improve the benefits once they see the savings), while saving considerable sums on one of the largest overhead costs, after salaries. Its a win/win situation!
Contact me for a FREE comparison to what you are paying now, and lets see if we can rein in these large and escalating expenses? 650-FARMERS, or ctrowbridge@farmersagent.com. or visit http://www.trowbridgeins.com/new/group.php
