Q: “We recently applied for life insurance with an insurance carrier and were told that our rating would be much higher than what we thought…
“We know the insurance is an important part of our estate plan, but the premiums for $750,000 have now gone up to over ten thousand dollars per year when we were anticipating only about seven thousand dollars per year.
“We weren’t expecting this extra cost and are having a difficult time making a decision. We were taking some medications, but nothing our doctor ever told us about was serious in his mind – or ours. This policy was to provide for the children not farming, but with this rate up in costs, we are rethinking the whole idea. What’s your take on the whole situation?” – signed, Rated Up.
Dear Rated Up:
First of all, let’s start with the medications you’re taking and the conditions your doctor has said are ‘nothing to worry about’. If you’re taking high blood pressure medication, yes, it’s controlled, but your body is under more stress than normal due to weight or coronary conditions and your doctor’s not going to say ‘Gee, you might die tomorrow if you don’t lose some weight!’. He knows that some people are going to take advice seriously, others are going to laugh it off, and other people, no matter how much you tell them aren’t going to lose weight or change their lifestyles. So, rather than try and change people, he will prescribe medication that will mitigate the issues, but not cure them. He knows you may die of something in the next ten or twenty years, but probably not today – so why worry you.
An insurance company – on the other hand – looks at it and says ‘Gee, if we take in ten thousand dollars per year in premium, based on our rates of return, and the number of people who will drop this insurance before there is a claim, this person(s) will have to live thirty–five years before we can actuarially pay this claim’. Big change in perspective for the insurance company versus the doctor. If the doctor had to guarantee you were going to live thirty–five years, he’d probably charge you ten thousand a visit too!
The other thing that the rating tells you is this. If you were rated up four tables, that means you are sixty percent LESS likely to live to normal expected life spans. If you were rated up two tables, that would decrease your chances by thirty percent of living out a normal life span.
A rating is saying you’ve just decreased your chances of living to an average age eighty–one for males and age eighty–four for females and, with your conditions, are far less likely to live to these averages.
Now, what you may not know is that certain companies deal with certain conditions far differently. One company may have the attitude if you’re taking blood pressure or cholesterol medication but are very well controlled, they would have no rating for you – or less of a rating. Some companies are good at diabetes, some are good for high blood pressure, some are better at weight. The other interesting factor is these companies are continuously monitoring their claims for certain factors, and if their claims show they have not been charging enough – or too much – they can change their attitudes – and costs – at any time. Companies that once were good for diabetics may now have a harsh attitude towards them because of the claims history on diabetics.
In other words, one company does not determine what you’ll need to pay for insurance. Research the market and see which company handles your situation the best. For this reason, I, myself, use a brokerage handling hundreds of companies because it’s a constantly shifting landscape.
The other thing to keep in mind is this. Sure the premium went up by three thousand dollars – but if fuel went up by three thousand dollars, or fertilizer or crop insurance, would you quit farming? Insurance has gone up – although the costs for life insurance per thousand have actually decreased over the past twenty years. It’s just that the average farm family needs so much more of it than they used to. I’ve got plans out there where we thought the costs to buy out the non–farming heirs would be three hundred thousand dollars and today, we can add another zero to that to bring it to three million dollars.
One thing about life insurance, when you compare it with the costs of buying out siblings, or paying interest on a loan, it’s tough to beat. If you had to take a $750,000 loan at five percent interest, the interest payments alone would be over $37,000 per year. This makes the ten thousand per year look pretty inexpensive, doesn’t it? How long would you have to live to beat the costs of paying the principal and interest on that loan? That’s the real costs of acquisition.
Do you have questions about estate planning? Need to know more about how you can “Keep the Family Farm in the Family”? Email questions to Michael Baron at [email protected] or call 800-373-4078.