Why You Need Life Insurance and How You May be Able to Save Money on it

Nov 13th, 2013

*Oaktree Financial Advisors is neither endorsed by nor affiliated with Eli Lilly

Life insurance is an essential part of your financial plan.  Here’s why.  Whether you plan to work for 10, 20 or 30 more years, there are probably people like your spouse and children that are depending on the income that you are providing to support your family’s lifestyle.  Your income also feeds the investing that you are doing to save for the day when you won’t work any longer – your retirement.  You have planned well.  You know how much you need to have saved for retirement and you are contributing to your investments to achieve that savings goal.  Now, something tragic and unexpected happens to you and you pass away.  Your family no longer has you.  You can no longer fuel the family’s retirement savings with your earnings.  Your plan was to continue working and contributing to those retirement investments for 10, 20 or 30 more years – wherever you are in your career.

Now that can’t happen.  And who’s going to pay the mortgage and other expenses?  This is where the life insurance comes in.  It provides a lump sum of money to your family so that they can invest it for the future and pay current and future obligations.  With life insurance as a part of the plan, if the unexpected does happen, the plan can continue to work.  It can save the family a lot of trouble at a time when they are already experiencing enough grief.

It’s not Black Friday yet, but you may have a savings opportunity you didn’t even know about.  Many employers offer some life insurance as a benefit.  Many of our clients are Eli Lilly employees.  Eli Lilly offers life insurance, at no cost to the employee, of two times your base salary.  In addition, Lilly employees can purchase another five times their base salary in supplemental life insurance.  Many times employees purchase the maximum amount of supplemental life insurance without giving it a second thought.  This is a good thing, however, you should also check other options for obtaining life insurance.  In addition to or instead of the Lilly supplemental insurance, you can purchase a private term insurance policy.  Often the private insurance is less expensive than the supplemental insurance.

This example is a case I recently worked on with a Lilly employee.  He just went through annual benefits enrollment and signed up for five times his base salary in supplemental life insurance.  So his supplemental life insurance amount will be $606,400.  He will pay $80.65 per pay period, which is $1,936 per year, for the insurance.  He is 56 years old.  At age 60 the cost will increase to $2,834 per year.  We compared this to see how much it would cost him to buy that amount of life insurance on his own.  For his situation we looked at a ten year level term policy.  When determining rates for life insurance companies consider how healthy you are.  The healthier you are, the lower the rate.  The middle column shows rates for preferred non-smoker.  This is a rate classification that the insurance company uses.  It’s not the very best classification, but the one just below it.  We showed this classification just to be conservative.  It’s possible that the client could get the very best rates, and then his savings would be even greater.  So the middle column shows that $606,400 of life insurance would cost him $1,445 per year if he bought it on his own.  The Lilly supplemental will cost him $1,936, so this is a savings of $491 per year.  Remember, in the fifth year, when he turns 60, the supplemental insurance cost increases.  The private term insurance cost stays level for the whole 10 years.  The total cost savings to him over 10 years is $11,283.  Let’s assume that he can’t qualify for preferred non-smoker because his health isn’t quite good enough.  We’ll assume that he gets standard plus non-smoker rates.  Those are shown in the third column.  Even at these rates he would save $2,052 over 5 years and $8,683 over 10 years. Actual results may vary. Past performance does not guarantee future results. Actual performance and results will vary. These case studies do not constitute a recommendation as to the suitability of any investment for any person or persons having circumstances similar to those portrayed, and a financial advisor should be consulted.

Don’t run out and cancel your Lilly supplemental insurance.  Keep it.  But check your options.  Apply for a policy and see how the numbers come back.  Only after you have a new policy in place should you cancel anything else.  And if there are savings to be had, maybe you could use it to help reach those retirement goals a little quicker.

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