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A Life Insurance Two-fer

Labor Day celebrates the working person and, it might seem to a visiting alien, the fact that all that money we earn from working needs to get spent somehow. Hence all the Labor Day deals: ½ off, 70% off, BOGO, double coupon, red-tag, free-shipping. If you are in the market for any kind of consumer good from your fall wardrobe to a smart speaker to a new car, chances are you can find a Labor Day sale and get yourself a better price. Unfortunately, I’ve never come across a holiday sale for life insurance. (Yet. I’m nominating Halloween as a starting point if this idea ever takes hold). When you are in the market for insurance, the best way to get an affordable price is to understand what drives insurance prices in the first place.

An insurance contract basically puts a price on probability. For life insurance, the premiums you pay as the contract owner represent the maximum price you can accept given the probability that you will live long enough that you could have saved up more money on your own by investing the premiums than the life insurance death benefit. The premium also represents the minimum the life insurance company is willing to accept given the probability that they might have to pay out to your heirs a much larger sum that your premiums will have accumulated if you die prematurely. And while the price of life insurance is not exactly negotiable, if you are concerned about costs, there are probability factors that you can manage to reduce the cost of your premiums relative to the eventual death benefit payout.

We already talked about the difference between term and permanent insurance which hinges on a very basic probability. There is a much lower probability that you will die in the next 10 years than in the next 30 years. So, the longer the term of your insurance, the more it is going to cost. Permanent insurance is calculated to cover you up to age 120 or more. As there is basically a 100% chance that you are going to die in that period, it is quite expensive. Although permanent insurance is relatively expensive compared to term, we discussed in our last blog why permanent insurance may be very necessary for a family that has a child with a significant disability.

Your overall health situation also contributes a lot to the calculation of probability and hence of premium. If you have a history of smoking or you have had heart surgery, or you are considered pre-diabetic, your premiums are going to be higher than a person of the same gender and age who does not have any health concerns. In extreme cases, you can be considered so unhealthy with such a high probability of dying prematurely that you will be labelled “uninsurable” and you won’t be able to buy life insurance on yourself at all no matter how much you are willing to pay.

One way to work with this situation is to consider what is called a “survivorship” or (less euphemistically) a “second-to-die” life insurance policy. In a nutshell, a second-to-die policy is a permanent life insurance contract that covers two people. The insurance company only pays out the death benefit when the second person dies. Since the probability that both covered parties will die prematurely is lower that the individual probability that either one will, the premiums are generally lower for this type of policy. A person deemed “uninsurable” as an individual might be able to be covered under a second-to-die policy if the other covered individual is relatively healthy.

If you are the parents of a child, youth or adult child with a disability, you and your financial planner may have determined that permanent life insurance is a key component of providing for your child’s future. If it seems that individual permanent life insurance policies on you and your spouse are beyond your budget or if one of you is older and/or in poor health, you may want to explore using a second-to-die policy to fund your special needs trust or otherwise provide those future resources. Keep in mind that with this kind of policy no money will be paid out when the first person dies. And, as with any financial strategy or product, whether a second-to-die life insurance policy would meet your family’s needs very much depends on your particular circumstances. You will want to work with one or more professionals to determine this.

There is no Labor Day sale for life insurance, where you can jump on a low-cost opportunity. However, shopping for that right life insurance “deal” is wise to do and can be done anytime

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