4/5/2014 10:15:00 AM Decoding insurance: Know your need to help with options
Glossary of insurance terms
Accidental Death Benefit: A rider to the policy that means additional payout if the death is an accident.
Death Benefit: The amount of money payable upon the death of the insured.
Dividend: Money added to your whole insurance account if people the company insures live longer or the markets rise. Paid-Up Additional Insurance: Additional insurance, purchased with dividends, which has a death benefit and a cash value, but does not require payment of additional premiums.
Premiums: The amount of money charged for the insurance policy.
This is the second in a series on finance. The first examined college financial planning. Future stories will investigate retirement planning and taming debt.
The Acts of the Apostles describes an early Christian community in which the faithful kept a common fund to help those in need, especially widows. This charity-fueled version of life insurance was preceded by a Roman military practice in which soldiers would buy into a burial club so the family's funeral expenses could be paid in case of a battlefield death.
The first life insurance in the American colonies was arranged by the Presbyterian Church for its ministers.
In the 1880s in New Haven, Conn., a young Irish-American Catholic priest founded the Knights of Columbus to strengthen the faith of men in his parish, but also to create a pool of funds to help widows.
Life insurance has sacred and secular roots. Today, some see it as angelic in time of need while others find it hellish to understand.
Will Britten, a Knights of Columbus insurance field agent from the Willamette Valley town of St. Paul, says 90 percent of what he does is decode life insurance.
"We don't know the day or the hour, so if protecting your family's finances is important to you, life insurance is one of the best ways to do that," says Britten, whose own young children attend St. Paul School.
Analyze the need
Britten's first step with anyone is to analyze the need. The big question is, "If you were to pass away tomorrow, what standard of living would you want for your family?"
A family with children and a single income will obviously require a lot of coverage. Parents with a special needs child may want to up the payout even more. Some younger people, planning for a future family, simply want to get insurance while young and healthy.
"I don't want the plane to be going down before I look for the parachute," Britten says.
Potential insurance buyers should consider whether it makes sense to buy enough coverage to pay off the house or handle the kids' college.
Your dependents will get your Social Security benefits, but once they turn are 18 or 19, that stops. It is good to figure that all in, Britten explains.
Decide how to cover the need
There are two main types of insurance, term and whole.
Term is temporary, set aside for a set number if years. At the end of the term, coverage ends and you get nothing. Term insurance is not like an account. You can renew at the end of the term, but the amount you pay for the protection — called the premium — may go up drastically. The attraction of term insurance is that the premiums are low compared to whole life insurance.
Whole, or permanent, insurance offers lifelong protection.
Premiums are much higher than for term. But whole policies can build cash value via dividends; not only will your beneficiaries receive what you put in, but they may get the dividends on top of that. Policy holders can draw out from their dividends.
Some financial advisors eschew whole life insurance, suggesting that clients buy term insurance and invest the rest in stocks and bonds. That is not Britten's advice.
"A lot of people misunderstand whole life insurance," he says. "It has withstood the test of time." Unlike investments, a down market won't shrink your whole policy, Britten says.
Britten says whole life insurance is a good way to protect one's survivors from real estate taxes. Life insurance payouts are not subject to taxes. He has noticed grandparents updating policies for the good of grandchildren or to donate to the Church or some other charity.
Young families without much income tend to rely on term, but as they are able, often add some whole insurance to the mix. Britten, for example, has a term policy to take care of the large chunk of need, but has a whole plan to last the rest of his life.
A third kind of insurance, called "return of premium," is a compromise between term and whole. With premiums somewhere in the middle, you get back what you put in if you live beyond the chosen term. There is no return on the investment, though.
Britten suggests that households review their insurance needs on an annual basis, making sure they are neither underinsured nor overinsured. Because people keep living longer, insurance companies are not paying out as much in policies and can offer lower premiums.
Some workers assume they will have enough coverage through their employers, Britten says. That is not to be trusted, since those who quit jobs or get fired will lose that coverage. Also, the employer, not the employee, is the one who controls the insurance; some firms stop paying premiums to balance the company budget.
Britten suggests that potential buyers look at the financial strength of the company. Ratings firms do independent investigations. "You want someone you can be assured will pay your claim," Britten says.
Unlike for-profit companies, groups like the Knights of Columbus and the National Catholic Society of Foresters have no taxes to pay and no stockholders to please. What is left after expenses is not taken as profit but goes to charity and to premium holders.
The Knights send a large donation to the pope each year and the Foresters give scholarships.
'People need life insurance'
"People need life insurance," says Tim Hall, an agent for the National Catholic Society of Foresters based in Myrtle Creek. "I have seen what happens when people don't have it. The ones left behind get stuck."
Often, survivors face unexpected expenses like delayed medical bills or anesthetists' fees. Some people even write in their will that they want to be buried not in Oregon but in Minnesota with the rest of the family, for example. Of course, there are funeral and burial costs, not paid for by Medicaid and often only partly paid for by Medicare's death benefits.
There are other reasons for life insurance, says Hall. Some people purchase policies and make their grandchildren the beneficiaries, Hall says.
In general, insurance is cheaper if you are young, healthy and not a smoker. After you turn 80, you cannot buy new life insurance.