Category: Life Insurance

Life Insurance for a Professional Racecar Driver? You Bet!

Since she was in her early 20s, Danica Patrick has driven a racecar—speeding 200 miles per hour around an oval track bordered by concrete walls. It’s dangerous.

Patrick said, “So no matter what your skillset is, those things just happen. Absolutely it is a risk.” 11-15-16

Forbes’ article, “Danica Patrick: You May Not Drive a Racecar, But You Still Need Life Insurance,” says that it’s a risk that she’s chosen to manage in part with life insurance. She’s owned life insurance since she started racing, and she now advocates on behalf of Life Happens, a nonprofit founded to help consumers make smart insurance decisions.

It’s a rite of passage to buy life insurance before your first race. However, Patrick has more personal reasons. Her parents were in favor, as each lost their fathers during childhood and witnessed the financial stress placed on their families. They managed the risk with life insurance and saving six months’ worth of expenses for an emergency.

As far as Patrick is concerned “she didn’t want to leave people with bills they can’t pay, and not only dealing with the sadness of a loss, but trying to figure out how you’re going to manage the rest of…life.”

Life insurance allows us to deal with personal loss without compounding it with financial stress. The suggested policy for most families is a term life insurance policy with a death benefit that is approximately 15 times their annual income.

With term life insurance, many life insurance needs will expire, assuming that a family is on track to reach financial independence around retirement age. The specific term of your policy should last at least through the children’s college years—and at most through the age at which you can reasonably expect to be financially independent.

If you want to create an estate, fund charitable bequests, replace an estate lost to taxes or build cash value, you will need some type of permanent life insurance—whole life, universal life, or variable life. Note that permanent life insurance creates additional financial complexity and can be expensive.

If you have a spouse or minor children, you have loved ones relying on you financially. Term life insurance can be pretty inexpensive. And even if you’re not a racecar driver, you face one of life’s most common risks—riding in or driving a motor vehicle.

As Patrick remarked, “It’s probably pretty uncommon to come across someone that hasn’t been in some kind of a car accident. Now, there are surely varying degrees, but you’re not wearing a six-point harness with a helmet on and an ambulance sitting nearby. So, it’s a risk no matter what you do if you’re driving anything.”

Reference: Forbes (Sept. 23, 2016) “Danica Patrick: You May Not Drive a Racecar, But You Still Need Life Insurance”

Get a Life Insurance Check-up to Be Sure the Prognosis Is Good

Insurance planning shouldn't begin until there's been some financial planning, according to CNBC in its article “3 life insurance mistakes you can easily avoid.” They cite three common mistakes that can be easily avoided or fixed: 11-03-2016

  1. Not enough insurance. About 37% of parents with young children don't have sufficient life insurance, according to a 2015 report. Of those who do have insurance, 50% have less than $100,000 in coverage. Do a thorough analysis of your life insurance needs to be sure you’ve enough to cover funeral expenses, replace your income for the family and cover debts like the mortgage.
  2. Not reviewing your medical records. You should ask for a copy of your medical records from your primary care physician before applying for life insurance because the insurers will get those records, as well. They’ll look at your medical history to gauge risk and determine rates. There could be potentially costly mistakes in the record that should be fixed.
  3. Focusing on avoiding estate taxes. You may have your spouse own the life insurance policy on you so that you can be smart with your estate planning. Since you don't own the policy, it won't be included in your estate when you die. However, what’s known as "three-corner life insurance"—where the owner, insured and beneficiary are all different is to be avoided.

This three-corner configuration has the effect of transforming the policy proceeds into a gift from the policy owner to the beneficiary but anything above the annual $14,000 annual gift tax exclusion would be considered a taxable gift to the owner. That would decrease his or her annual lifetime exclusion.

Reference: CNBC (Sept. 16, 2016) “3 life insurance mistakes you can easily avoid”

Is Whole Life Insurance Right for You?

Term life insurance will cover you for a certain period of time. Alternatively, whole life insurance also includes a savings account known as its cash value, which builds over time. You can borrow against the cash value or surrender the policy for the cash.

Huffington Post’s article, “5 Questions to Ask Before You Buy a Whole Life Policy,” sets out things to ask yourself before buying a whole life policy.

  1. Do I really need it? Whole life can be helpful, but it’s not necessary for everyone. If you require just some temporary coverage until you’ve paid off debts or your kids get through college, choose term life insurance. It’s inexpensive if you’re young and healthy. However, whole life can be a good if you: 9-27-2016
  • Have a big estate that’ll be subject to taxes when you die;
  • Want to provide money to heirs for a funeral and final expenses or leave a legacy, even if you spend all of your retirement funds;
  • Are the parent of a lifelong dependent, such a child with special needs—a life insurance payout can fund a special needs trust; or
  • Maxed out contributions to tax-advantaged retirement savings accounts and want a safe place to grow cash long-term as part of your diversified portfolio.
  1. Can I afford it? Whole life costs a lot more than term life because some of the premium goes into the cash value savings account—and the interest rate and death benefit are also guaranteed. Note: it takes years to build up substantial cash value, and if you decide to quit the policy after only a few years, you’ll be out a chunk of change and have little or no cash value to take with you. There’s also a fee to surrender the policy during the early years. If you’re in need of permanent coverage, but can’t afford the premiums, look at a term life insurance policy that can be converted to whole life. Regardless of what type of policy you’re buying, get quotes from several companies and work with a qualified life insurance professional.
  2. How much coverage should I get? This depends on how you want to use the insurance. If you want it for estate planning, the payout needs to cover the estate taxes so that your heirs don’t have to pay them. Note: you will want to create an “irrevocable trust” to own the life insurance and to be the beneficiary on behalf of your loved ones to keep the proceeds from becoming part of your taxable estate. If you want to take care of final expenses, make sure it covers the funeral and any debts you’ll leave behind.
  3. How’s the cash value going to grow? The cash value in a whole life policy has a guaranteed annual return. If the company is a mutual insurer, there might also be annual dividends. This is a share of a company’s surplus, but they’re not guaranteed. Each year, a mutual company makes the decision whether to declare dividends and the amount to give to policyholders. The dividends you get will be based on your policy’s cash value. You’ll be eligible to earn larger dividends as you maintain the policy and let the cash value grow.
  4. How’s the company? Check on the financial strength ratings of the insurance companies you’re comparing. Get ratings online from A.M. Best and select a company with at least a B+ rating.

Talk with your estate planning attorney about your overall finances and how life insurance fits into your comprehensive strategy before making a purchase. He or she can refer you to a qualified life insurance professional to help.

Reference: Huffington Post (August 3, 2016) “5 Questions to Ask Before You Buy a Whole Life Policy”