Alternatives to Life Insurance
Life insurance is an important part of your family's financial plan. But what options do you have if you don't qualify for traditional life insurance. Believe it or not you actually have some really good options. In this article we will discuss some of the alternatives you may not have thought about, so you can find a great solution that works for you.
You may not think that you qualify for life insurance, but the fact of the matter is that almost everybody qualifies for some life insurance. There are two common types of insurance that are available to people who would typically be rejected by the insurance companies. The first type of insurance is a final Expense policy. These policies can range from a few thousand dollars up to several thousand dollars. These policies will typically cost more than a person would pay if they were in good health, and will likely have a small death benefit, but they can be a good option for people who don't have any other way to pay for a funeral.
The other type of policy that can work well is a guaranteed or simplified issued policy. These policies can give you greater protection and benefits than a final expense policy, but they do sometimes have a few more health questions. For some health conditions these policies will look at your medical history for the past year or two, for other health conditions they may look back 5 or even ten years. Still if it's been a few years since you had any major medical issues, these policies can often get you a bigger policy at an affordable rate.
If you don't qualify, or don't feel like these types of policies are right for you, there are a few other things that you can do to create a reserve of your own that could be used as a form of self insurance. And while these types of accounts won't usually have the same kinds of death benefits of a traditional life insurance policy, if you contribute to one of them consistently for 5 or more years you could easily have enough money to cover most of your final expenses.
A good savings account can be a good option for people who don't qualify for life insurance. A savings account won't get you the highest returns, but they are consistent and fairly easy to use. The savings account that I use is called Marcus (by Goldman Sachs). It's an online account that will typically give you a higher interest rate than the banks. Besides having higher rates there are two other things that I really like about it. First it is super easy to set up automatic transfers to grow the account every month without having to remember to add your money(you can pick a different frequency if you'd like). The other thing I like about Marcus is that it is pretty easy to add a second account once you get a little money set aside. This can help you grow your money even faster, by creating a CD ladder (even if it is a ladder with just a rung or two). Annuities and ETFs can often get you higher rates than a savings account, but they can be a good option for some circumstances.
If you don't qualify for traditional insurance but you are expecting a longer time horizon, you might get a better return from the stock market. The stock market has more volatility, but over time can provide higher returns. When people invest in the stock market they can invest directly in a specific company or they can invest in a variety of companies through mutual funds or ETFs. When people buy a single stock their gains or potential losses are tied to one specific company. A safer approach to the stock market is investing with diversification. Mutual funds and ETFs can increase diversification, and lessen the risks of investing, but it should be noted that some mutual funds and ETFs are not very diverse, and may have higher fees. Two common strategies for broad diversification are total market funds and S&P 500 funds. Total market will invest in every possible stock (i.e., all U.S. stocks). S & P 500 funds invest only in the 500 largest companies in america. Either of these strategies can produce good results, but I tend to favor the S & P 500 when available. One big advantage of an ETF is that they can be traded at any time of the day. This and other features allow a person to set up automatic purchases of a fund. Companies such as Vanguard offer low cost funds, with good options, and the ability to set up automatic purchases. By purchasing an ETF or a savings account, you can, overtime, essentially become self insured, meaning you can create a dedicated pool of money that will cover your expenses. The down side to this approach is that there is no extra death benefit, so what you save is what you've got.
Annuities are another tool that can be used to plan for the future. Annuities have a few unique characteristics that make them a great option for some people. One of the most interesting features of annuities is that they are issued by life insurance companies so annuities can be exchanged for life insurance without paying any taxes on the gains of the annuity. There are a few different kinds of annuities, so it is important to understand the features and potential drawbacks of the annuity you choose. For a life insurance replacement, I recommend annuities that payout the full account value plus interest, and any bonuses if the annuitant passes away (some annuities charge an extra fee for this, but there are a lot that will include this feature for free).
There are three main types of annuity:
1) Guaranteed 2) Indexed and 3) Variable
Annuities have three main advantages.
Guaranteed Annuities guarantee a specific level of interest for a set number of years. This rate is often higher than banks offer with their long term products (like Money Market accounts and CDs).
At the time of this writing there are guaranteed annuities that have higher interest rates than anything the banks have been able to offer for the last ten years.
Indexed Annuities have the potential to provide higher interest than Guaranteed Annuities, because they are designed to go up when the stock market goes up (even though they are not directly invested in the stock market). Indexed annuities are even better when the market goes down, because all of the increases they receive are locked in annually, and if the market falls they aren't at risk for market losses. When people are getting close to retirement, Indexed annuities can be a good option to ensure that the money they have earned doesn't disappear. Indexed annuities will often outperform a guaranteed annuity if you give them enough time. In some environments an Indexed Annuity will even outperform an ETF, but this is not a guarantee. When considering an Indexed Annuity it is important to see illustrations of it's potential, but also illustrations that show what it might do if the index it is linked to has a few bad years. Indexed annuities often have little to no fee associated with them. With indexed annuities it is a good idea to know what the index crediting strategy is for the product you are looking at. A good agent should understand these strategies inside and out, and should be able to explain them in a way that you know the advantages and disadvantages of the strategy you select.
Variable Annuities have some of the features of ETFs and Mutual funds, combined with some of the features of other annuities. They have the potential for even higher returns than Indexed Annuities, but they also have the potential to under-perform an Indexed annuity. Variable annuities often have the highest fees of any of these solutions. In fact their fees could be double or triple the fees of a good ETF. When looking at a Variable Annuity always ask about the Mortality and Expense fees (M & E) because a few percentage points here can dramatically impact your returns. On a positive note, variable annuities can can be structured to protect your money from major losses, but of course this benefit, often comes at a cost, usually a cap applied to the potential upside.
Within these three categories of Annuity there are two different methods of funding an annuity. Some annuities require all of the money to be paid at once (or within a short period of time... often one year or less). Other companies offer annuities that allow for multiple payments. Usually these are set up as monthly payments. Some companies require an initial lump sum, but will then allow additional premium contributions. Other companies will let you set up a monthly bank draft. Most annuities require a minimum of $50-$100 for automatic payments, though these payments can often be paused at anytime, as long as the annuity meets a minimum balance.
Annuities can be a great option for people who want the potential for higher returns, but who don't want the roller-coaster of risk that sometimes comes with the stock market. However; it is important to understand the benefits and the potential drawbacks of annuities. When looking at an annuity, make sure you understand the surrender charges for cashing out the policy early, and also which circumstances these charges apply to and which ones they don't. Also it is good to know if there is a cap or a participation rate associated with the annuity.
If you'd like more information about any of these products, I'm happy to offer a free consultation. You can also get a free, no obligation quote on this website.
Life insurance
The other type of policy that can work well is a guaranteed or simplified issued policy. These policies can give you greater protection and benefits than a final expense policy, but they do sometimes have a few more health questions. For some health conditions these policies will look at your medical history for the past year or two, for other health conditions they may look back 5 or even ten years. Still if it's been a few years since you had any major medical issues, these policies can often get you a bigger policy at an affordable rate.
If you don't qualify, or don't feel like these types of policies are right for you, there are a few other things that you can do to create a reserve of your own that could be used as a form of self insurance. And while these types of accounts won't usually have the same kinds of death benefits of a traditional life insurance policy, if you contribute to one of them consistently for 5 or more years you could easily have enough money to cover most of your final expenses.
Savings
ETFs
Annuities
There are three main types of annuity:
1) Guaranteed 2) Indexed and 3) Variable
Annuities have three main advantages.
- Annuities can generally provide higher rates than fixed products from a bank or credit union.
- Annuities often have a death benefit (This means the payout could be higher if you pass away than it would be if you were to pull your money out early).
- And Annuities can be converted into Life Insurance policies through a 1035 Exchange.
Guaranteed Annuities guarantee a specific level of interest for a set number of years. This rate is often higher than banks offer with their long term products (like Money Market accounts and CDs).
At the time of this writing there are guaranteed annuities that have higher interest rates than anything the banks have been able to offer for the last ten years.
Indexed Annuities have the potential to provide higher interest than Guaranteed Annuities, because they are designed to go up when the stock market goes up (even though they are not directly invested in the stock market). Indexed annuities are even better when the market goes down, because all of the increases they receive are locked in annually, and if the market falls they aren't at risk for market losses. When people are getting close to retirement, Indexed annuities can be a good option to ensure that the money they have earned doesn't disappear. Indexed annuities will often outperform a guaranteed annuity if you give them enough time. In some environments an Indexed Annuity will even outperform an ETF, but this is not a guarantee. When considering an Indexed Annuity it is important to see illustrations of it's potential, but also illustrations that show what it might do if the index it is linked to has a few bad years. Indexed annuities often have little to no fee associated with them. With indexed annuities it is a good idea to know what the index crediting strategy is for the product you are looking at. A good agent should understand these strategies inside and out, and should be able to explain them in a way that you know the advantages and disadvantages of the strategy you select.
Variable Annuities have some of the features of ETFs and Mutual funds, combined with some of the features of other annuities. They have the potential for even higher returns than Indexed Annuities, but they also have the potential to under-perform an Indexed annuity. Variable annuities often have the highest fees of any of these solutions. In fact their fees could be double or triple the fees of a good ETF. When looking at a Variable Annuity always ask about the Mortality and Expense fees (M & E) because a few percentage points here can dramatically impact your returns. On a positive note, variable annuities can can be structured to protect your money from major losses, but of course this benefit, often comes at a cost, usually a cap applied to the potential upside.
Within these three categories of Annuity there are two different methods of funding an annuity. Some annuities require all of the money to be paid at once (or within a short period of time... often one year or less). Other companies offer annuities that allow for multiple payments. Usually these are set up as monthly payments. Some companies require an initial lump sum, but will then allow additional premium contributions. Other companies will let you set up a monthly bank draft. Most annuities require a minimum of $50-$100 for automatic payments, though these payments can often be paused at anytime, as long as the annuity meets a minimum balance.
Annuities can be a great option for people who want the potential for higher returns, but who don't want the roller-coaster of risk that sometimes comes with the stock market. However; it is important to understand the benefits and the potential drawbacks of annuities. When looking at an annuity, make sure you understand the surrender charges for cashing out the policy early, and also which circumstances these charges apply to and which ones they don't. Also it is good to know if there is a cap or a participation rate associated with the annuity.
If you'd like more information about any of these products, I'm happy to offer a free consultation. You can also get a free, no obligation quote on this website.