Life is Short

I recently lost my step-brother the day before his 42nd birthday. His passing was a stark reminder that life is unpredictable and sometimes far too short.

Premature death seems unlikely but almost all of us know someone who passed too soon. According to data from the Center for Disease Control, 0.2% of 35-44 year olds died in the United States in 2007 (the most recent year reported). The death rate rose to 0.4% for those 45-54 and 0.9% for ages 55-64. These percentages may seem low but actually add up to hundreds of thousands of lives each year.

How can you prepare your finances for the possibility of premature death?

  1. Buy enough life insurance. Level-premium term life insurance is all most people need. Have enough life insurance to meet your financial goals (e.g. college for kids, retirement for spouse/partner, pay off debt) without your future work income. The group life insurance offered through your employer may not be enough. You can use this calculator to estimate the amount of life insurance you need.
  2. Create an inventory of your accounts, assets, and digital-assets with instructions on how to find and access them. Include a list of your usernames and passwords or use an application such 1Password to manage them.
  3. Execute a Will and, if appropriate, a Trust.
  4. Check that your beneficiary designations on your retirement accounts and life insurance are accurate and up-to-date.
  5. Title non-retirement accounts (e.g. savings, brokerage accounts) as Joint or Transfer on Death accounts.

Take care of these tasks now so you can rest assured that your loved ones will only have to worry about missing you if you die prematurely.

Life can be short. Plan for it.

Comparing Group and Individual Term Life Insurance

Choosing the right life insurance policy can be confusing. To help you navigate your choices, Oliver Financial Planning, LLC (OFP) teamed up with Low Load Insurance Services, Inc. (LLIS) to help University of Michigan (U-M) employees compare their optional group term life insurance and individual term life insurance. If you do not work for U-M, you can apply the comparison to the life insurance options available through your employer.

Before we dig into the group versus individual policy comparison, I want to note that we are not considering whole life insurance in this analysis. If you are like the majority of people, term life insurance is all you need.

So, are you better off electing optional term life insurance through your employer or shopping for an individual policy? Let’s take a look.

Our friends at LLIS reviewed the current cost of optional life insurance available to U-M employees and compared it to the current cost of an individual policy. The chart below summarizes LLIS’ findings. (Click on the image to enlarge it.)


Chart 1


The chart compares the annual cost of a $250,000 individual term life insurance policy (second column) with the annual cost of the same amount of optional group term insurance available to U-M employees (third column). The term period of the individual polices are designed to cover the insured person through age 65 (or 70 in the case of a 60 year-old).

The cost of the individual insurance is broken down by gender and shows a range to account for two separate levels of medical underwriting (based on health history.) Group rates are not gender-specific but increase every five years based on the employee’s age (“quinquennial” pricing).

A glance at the chart shows that the group insurance is less expensive than individual insurance for young employees. Not until age 50 for women and age 55 for men does the individual policy becomes less expensive on an annual basis. The trick, however, is that we rarely hold life insurance for one year. A better comparison would look at the cost of holding each type of insurance over a longer period because individual policies lock in a specific annual cost for the entire term period, whereas group policies typically increase in cost every five years.

Consider the following examples:

  • A 45 year-old, preferred-rated male would pay $395 for 20 years (for a 20 year individual policy) for a total of $7,900. Under the U-M group plan, he would pay a total of $10,785[1] because the premiums would increase every five years. The individual plan would save him $2,885 over the life of the policy.
  • A 45 year-old, preferred-rated female would pay $320 for 20 years for a total of $6,400 with an individual policy. Under the U-M group plan, the same female would pay a total of $10,785 over 20 years, which is $4,385 more than the individual policy.

The moral to this story is that it often makes financial sense to take out an individual policy rather than going with your group option by default. Other reasons that favor individual life insurance include:

  • It stays with you regardless of your employment status (although U-M’s plan does offer a Conversion Privilege);
  • You could save even more versus group rates if you are in exceptional health and get rated as “Preferred Plus”;
  • You can “ladder” multiple policies over different time periods (e.g. one $250,000 policy for 10 years and another $250,000 policy for 20 years) to lower your cost; and
  • Individual polices often offer additional benefits including conversion to whole life insurance and early payout for a terminal illness.

In contrast, who might benefit from the group insurance?

In summary, the most important step for you to take is to get life insurance if anyone relies on your income. Whether group or individual term life insurance is best for you depends on your specific circumstances. Keep in mind that you can take a hybrid approach and use both group and individual coverage to meet your needs.

If you would like help determining how much life insurance you need and which type is right for you, feel free to contact Oliver Financial Planning or Low Load Insurance Services.

[1] Group cost for 45 male/female, 20 years = (228×5) + (375×5) + (585×5) + (969×5) = 10,785

Disability Insurance for University of Michigan Employees

If you work for the University of Michigan (U-M) and have not elected its optional group disability insurance, you have a unique opportunity during Open Enrollment this fall. You can elect U-M’s Expanded Long-Term Disability insurance benefit without having to go through medical underwriting. That is a big deal if you have a past or current medical condition that would make you ineligible for disability insurance or that would make it prohibitively expensive.

I cannot stress strongly enough the importance of disability insurance. No one plans to become ill or injured, but I have seen it

a number of times with my own clients. Furthermore, very few people have enough money in reserves to sustain themselves through a prolonged period of not getting paid. Disability insurance will replace some of your earnings (65% for U-M’s Expanded Long-Term Disability plan) if you become disabled and cannot work.

Do yourself a big favor and elect U-M’s Expanded Long-Term Disability insurance coverage during Open Enrollment if you do not already have it. Learn more about it at this link. Open Enrollment for U-M employees is October 28 – November 8.

Variable Annuity in an IRA

In my profession as a Certified Financial Planner™, nothing gets my blood boiling faster than blatant acts of self-interest by other financial advisers. One of the most obvious examples of this type of behavior is when advisers invest their clients’ Individual Retirement Arrangements (IRAs) in variable annuities.

In my view, variable annuities are almost always a bad idea as a stand-alone investment. Most are exceedingly expensive, complicated, and illiquid. Occasionally, a low-cost variable annuity can be justified as an additional way to invest on a tax-deferred basis if an investor is already maximizing her other tax-deferred investment options. But this situation is a rare exception to the rule.

Yet I regularly work with new clients whose former advisers recommended they invest their IRAs in variable annuities even though an IRA is already a tax-deferred investment vehicle. In these cases, the investors are stuck (due to many years of high surrender charges) in high-fee products for no good reason and I’m left to help them make the best of a bad situation.

I was recently working with a colleague on a project for a new client, and he asked me why the client had bought a variable annuity in his IRA. I replied that he was asking the wrong question. Investors put their trust in financial advisors to steer them in the right direction. The appropriate question, I said, was why had the so-called advisor sold it to the client. Unfortunately, the answer to that question is all too clear to those of us in the industry – for the large commission.

But don’t take my word for it. The U.S. Securities and Exchange Commission and the Financial Industry Regulatory Authority have written investor alerts on the subject.

If your financial adviser recommends that you invest your IRA in a variable annuity, he almost certainly does not have your best interest in mind. It’s time to find a new adviser.

Please note that this blog post is for educational purposes only and should not be construed as advice specific to your situation. You should get advice from a legal, accounting, or investment professional before deciding what course of action is appropriate for you. Please note that this blog post is for educational purposes only and should not be construed as advice specific to your situation. You should get advice from a legal, accounting, or investment professional before deciding what course of action is appropriate for you.

Skimmers, Jitters, and Complaints

Below are the interesting personal finance links I have come across since my last post: