The Goose that Lays the Golden Eggs!

You insure you home because it is worth $100,000 or more ... you insure new cars because they are worth $10,000 or $20,000 ... so if something happens to these investments you would lose a lot of money. So you insure things that help you live like you want to and things that are worth a lot of money.

Lets imagine that you have a goose in the basement of your house that lays golden eggs. Everyday you go to the goose and get an egg worth hundreds of dollars. Year in and year out that goose is popping out golden eggs just for you and your family.

What would you insure that goose for? $100,000, $250,000, a million dollars? Would you say that a golden egg laying goose is nearly priceless and it's loss would hurt your family's standard of living? Of course it's priceless, it's worth more than the house you house it in ... you can always get another house but money everyday, that's priceless.

Okay, so the goose is "YOU"! You bring home a paycheck that your family depends on and you do that everyday month after month, year after year. You are priceless to your family so what do you have in life insurance? Is it enough to replace all the income you would have brought home during your working years? No one wants to think about it but if you died tonight how would your family live? Would they be able to stay in the house they know as home? Would they be able to maintain the same standard of living? Would your spouse have to get a second job and send the children to daycare while they struggled to make ends meet?

Think about that ... then tell me what you think is the most important type of insurance. Life insurance is the difference between a sad day and an unbearable lifetime of loss. If your family loses one of the most important people in their lives it is devastating, but if they lose their income in the same day it would be horrific. So don't EVER go without life insurance. It is more important than any other form of insurance.

Now having said that, the question is how much insurance and what type should you have, and that is a very personal question. I'll give you a quick overview of how to figure what you need and what type would work best for you but, you need to see a professional that you trust and talk through your needs.

Okay ... much do you need? Well, the basic formula is based on 4 basic needs;

1. Final expenses (which is about $10,000 average).

2. Pay off debt (home, autos, credit cards).

3. Provide for the children's higher education (some folks want to pay for it all and some say they need to pay for it themselves and still others say they want to pay half).

4. Provide for the lose of income (some experts say 10 years some say 5 years but this is the big one).

The first two are easy, ten grand for the final expenses unless you have a more extravagant funeral planned for yourself. Cremation can be a little cheaper but will still run you $7,000 in our neck of the woods. Of course if you have a huge memorial made from imported Indian marble or a deluxe plot next to your favorite movie star you'll need to add that to the cost. Debt is a personal question but it has a definite answer as well, how much do you owe? Add that amount to the final expense. The average family in America owes $8,400 in credit card debt, $14,000 in car loans or educational loans, and $85,000 in mortgage debt. So most families will put somewhere in the neighbor hood of $108,000 in total debt.

Number three is a huge question mark for most families, if you have more than one child and you are in the middle to upper middle class you may have plans to pay for their school 100% but more than one or a lower income may indicate that you need to plan to plan only part of their college costs. Or perhaps you paid for your own education and you feel that they should too ... there is no right or wrong answer here only a choice that reflects your personal values and needs. On average a bachelor degree will take 5 years to complete and tuition will cost about $12,000 a year so lets say the average household would want to pay half of their two children's' education so we'll put $60,000 in this example.

Finally, how much income do you need to replace? I like the five year rule. No science here I just think that it is an easy number to come up with and easy to wrap your head around. Five years of income is enough to support the family while your spouse returns to school to get new training and a better job, or it is a big enough stake to invest and draw a reduced income for a longer period of time, supplementing the family income until the children leave the house and are on their own. The average income for an individual in the US regardless of age, education or gender is (depending on who you ask) about $37,000, so that is what we will assume for our example. Which means we will plug $185,000 in the formula.

1. Final Expense = $10,000

2. Debt = $108,000

3. Child's Education = $60,000

4. Income replacement = $185,000

Total = $363,000 in needed death benefit

Most people have some life insurance at work is two times your salary so you can subtract $74,000 from the total need, which leaves $289,000 that our imaginary family provider needs to protect his family.

So, what type does he (or she) need? Term? Level Term? Return of Premium Term? Whole life? Universal Life? Again, I have some ideas but you have to discuss your situation with a professional you trust, to decide which you need.

Quickly ... here is my opinion, "coverage is the most important thing!" Some of these types of insurance have great benefits over the others but first and foremost you need to secure the amount that you need.

Term is the cheapest but if you stop paying on it before you die, you get nothing, plus the price is based on your current age so it will increase in cost each year that you own it.

Level Term is more expensive but it doesn't increase for 10, 20 or 30 years ... at the end of the 10, 20, or 30 years, the cost will increase dramatically. If you stop paying on this before you die you get nothing.

Return of Premium Term is more expensive still and is just like the Level Term except that you get all the premium back at the end of the 10, 20, or 30 year term if you don't die.

Universal Life is a whole life policy based on interest rates the cost never increases and the value is tied to the interest rates of the day. So the cash value available at retirement age will be great if interest rates where high during the time you held this product or not so great if they were low during the time you held it. It is generally more expensive than the Return of Premium Term, but the values are not guaranteed.

Whole life is the most expensive type of life insurance but it gains value based on dividends and that is the most consistent and rapid way to gain cash value in a life insurance policy. Values are not guaranteed but, you can judge the likely hood of success by the longevity of the company in your community.

This is important stuff so call your agent today to talk about it.

J

How Insurance Works

Insurance is purchased to safe guard something from total loss. When you buy insurance from a company, they are taking the risk that many people share and pooling the money to be paid out to the statistical loser as it were.

Okay for example Let's say that a tomato plant costs $10, if statistically one in ten tomato plants die and you, along with 9 other tomato plant owners pay the Tomato Insurance Company $1.10 a year for tomato plant insurance, then the insurance company knows that it will probably pay out $10 in claims and draw in $1 in profit. The tomato plant owners are paying a little more for the plants but they are now safe from losing their whole investment.

But what happens if one tomato plant owner is careless and kills 2 plants. Now the insurance company loses $9 (they take in $11 in premium and pay out $20 in claims), so next year they will need to charge more to break even. They can do one of two things, raise the premium for the careless grower or raise the premium for everyone.

Lets say that the insurance company decides to raise every one's premium to cover the losses and break even. The second year everyone will pay $2 for their insurance and one plant will die so the company will bring in $20 and pay out $10 which will give them a net of $10 profit this year and -$9 last year so for the two years they made $1.

Okay, but now remember that the grower was careless so why should the other insureds and the insurance company pay for the carelessness of one grower? Lets see what happens if the insurance company just raises the premium of the careless grower. So instead of raising every one's premium by 90 cents the company raises the one grower's by $1.50. So year two the insurance company gets $11.40 in premium and pays out $10 in claims and is $1.40 to the good for this year but still has the $9 loss last year to contend with and so is at a net of -$7.60 so the careless grower will have to pay the higher premium for 5 more years to correct the profit loss from that one year of extra loss. But when you take the $1.50 increase that the careless grower in paying and multiple it by the 6 years that he is paying it ... yep that's right, even though the insurance company paid out $20 in the first year for him ... his total increased premium amounts to $9 more than the other insureds.

So even if the insurance company raises your rates you will still come out ahead with the higher premium in most cases. Now if that is all there is to it why do some people get canceled by their insurance companies?

Well, sometimes it is too costly to insure someone, even if you can charge them an enormous premium. Insurance companies make a profit with their premium and they deserve it because they take the risk of statistical loss, but their profit will quickly evaporate with a few big storms or careless growers. If that happens they will sometimes withdraw from a market (like some national carriers have done in Florida) or cancel a customer that has cost them more than they can recover with the possibility of greater loss in the future.

Insurance companies have a lot of cash ... they are mandated by law to maintain enough to pay the claims that occur during the year. They will often have enough cash reserves to invest and improve their profit but not at the expense of claims that are due.

Insurance is a good thing but it is a contract and it has limitations. Be sure to read the limitations of any policy that you buy. The contract is not flexible so you need to know what is covered and what is not ... and if it is not covered you need to accept that and don't expect them to break the contract to "help you out" ... in the same way don't let the insurance company break the contract by not paying you what is due if you have a covered claim.

That's all I have to say about that ...

J