Farmers Difference in Life Insurance
Written: Aug 31 '03 (Updated Sep 17 '03)
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Pros: They have products for every need.
Cons: They are picky on who they will insure for the higher dollar amounts.
The Bottom Line: Regardless of what company you choose life insurance is too important not to have. I choose Farmers because the agents can offer the best mutual fund companies in the business.
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| jwimberley's Full Review: Farmers Insurance - Life |
I knew from the time I was 21 that I needed to get life insurance but I didn't know anything about where to go or what kind of insurance to get. I had heard people talk about cash value life insurance but that was all I knew. So I went to my Farmers Agent and asked him about life insurance. This review is a synopsis of the conversation that we had and the information that he passed on to me followed by my reasons for choosing Farmers over the other companies available.
There are essentially only two kinds of life insurance, term (temporary) and whole life (permanent). There are variations of each one but they are the basis of the life insurance industry.
Term Insurance is temporary coverage for a temporary need. Think of it as renting a house. If you pay your rent each month you get to stay in the house. If you don't pay your rent you get evicted. If you reach the end of the lease and the owner wants to renew with you because you have been a good tenant then they will sign a new lease usually at a higher monthly rent amount. If you pay your term premium each month you have insurance, if you miss a month the insurance goes away. If you reach the end of the term and the company wants to renew with you because you are still healthy then they will sign a new term at a higher monthly rate based on your current age, however, if you are sick you might not qualify to renew and at the end of the term you are left uninsurable and with no coverage. Terms usually come in 5, 10, 20 and 30-year increments. The cost is based on your age, sex and current health. If you are a young, non-smoker and healthy you can get term insurance very cheap. I have seen $500,000 policies sold for $30 per month. But that same $500,000 policy for a 50-year old male might be $200 per month if he is still healthy.
Whole life is a permanent policy designed to keep the same rates throughout your lifetime. It fits the same comparison but is more like buying a home. The payment stays the same and there is no fear of losing your insurance because you get sick. In some cases if you are getting a good rate of return on the cash value of the policy you might even be able to pay it off in about 20 years. After that the interest income from the cash value is enough to pay your premiums and you can stop making payments but your life insurance stays in force. The price is significantly higher than on term insurance because of the cash value of the policy. It is like buying a limitless term policy and putting some money in savings each month too.
Now the blending of these two concepts is the Universal Life policy. There are two kinds of UL, fixed and variable. The fixed Universal Life policies promise a minimum rate of return and the insurance company invests the cash value for you. The variable makes no promises about the return but you decide how it is invested in various mutual funds. The Universal Life premium is basically split into two parts. You pay in say $100 each month and the company uses $20 to pay for a term life insurance policy and $80 of it goes into your cash value. Now as you get older you keep paying $100 a month but the insurance gets more expensive. Eventually about the time you hit 60-years old the policy starts to take money out of the cash value in order to pay for the term life insurance policy. The key to making this work is that you have enough in the cash value by that time that the interest income is paying for the life insurance and you cash value is protected. However, if a UL is under funded you may end up at 80-years old with no cash value left and a life insurance bill of $300 per month. Don't let that happen, put enough premium in while you are young so that the magic of compounding interest works for you and not against you.
Ok, now that you have all of the information it is time for a quiz. If you are 30-years old and need $250,000 worth of life insurance, you can get a 20-year term policy for $30 per month or you can get a Variable Universal Life policy for $120 per month. Which one is cheaper?
Well, let's do the math...
$30 per month for 20 years is $7,200
$120 per month for 20 years is $28,800
That seemed simple, the term is cheaper right? Oh, we forgot to add back in the cash value of the Variable Universal Life policy. Well, market performance hasn't been great over the last four years but even in spite of the current conditions the average return of the market over any 20-year period has been at least 9% so we will use that as a hypothetical return.
With a 9% return on investment the cash value of the VUL in 10 years is just over $13,000 and after 20 years it is about $30,500. So let's refigure the true cost of 20-years worth of insurance.
Term $30 per month for 20-years is $7,200
VUL $120 per month for 20-years is $28,800 minus the cash value of $30,500 gives a negative cost of $1,700. In other words the company is going to pay you $1,700 to keep your insurance in force for 20-years.
It gets even more dramatic when you realize that you would have to renew that term policy at age 50 at a rate of $100 per month for another 20-years. At the end of that term you would be uninsurable, you can't buy a term policy after age 65 from Farmers. There are some companies out there that sell burial policies on a term basis but you are talking about $30-$50 per month for $10,000 worth of coverage. With the Variable Universal Life the premiums are designed to stay level and the policy stay in force to age 110.
Well after all of that information about what kind of insurance to get I had to make a decision about what company to use. I left my Farmers agent's office armed with a lot of information and started talking to other companies. Some only offered term insurance and although it was a lower monthly cost than the term that Farmers offered that wasn't what I was looking for. State Farm and Allstate both offered the Variable Universal Life policies that I was interested in but there was a major difference between them and Farmers. My Farmers agent was a representative for several independent mutual fund companies including: Security Benefit Group, Franklin Templeton, MFS, Oppenheimer, WM Group of Funds, The American Funds, Putnam Investments, AIM Funds, Scudder Investments and Nations Funds. The State Farm agent could only offer the State Farm group of funds and while I don't remember what company the Allstate agent brokered for his selection of funds was also very limited. When I compared the fund costs with the annual returns American Funds and WM Group were far and away my best options and Farmers allowed me to split the cash value of my policy between the two companies to increase my diversification. Another thing that I really liked about Farmers was that they would let me make changes to my asset distribution at any time, up to 12 times per year with no charge. That way if I ever felt that another mutual fund company was offering a better fund for my taste I could make a phone call and have the trade done that night. I felt that while Farmers might not have been the cheapest company in the life insurance market they certainly had the best range of options. In the end my agent put together a package that included everything that I had wanted. He offered a small Whole Life policy to cover funeral expenses, a 30-year level term policy to cover our mortgage (temporary policy for a temporary need) and a Variable Universal Life policy to cover the balance of our insurance need (5 years income) and provide a vehicle for additional retirement savings. No other agent that I had talked to thought to combine the different types of insurance to get the job done and keep the monthly budget as low as possible.
One thing I will say about Farmers that I listed in the Cons section. If you are looking for $500,000 or more in life insurance be prepared for a much longer approval process. They require a full physical, an attending physicians statement, and financial disclosure statements. Basically you not only have to prove that you are healthy enough for that much coverage you have to demonstrate need for that much coverage.
I hope this helps you in making future decision about life insurance for you family. Please feel free to e-mail me with any questions or comments about the information in this review.
Joshua
Recommended:
Yes
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jwimberley
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Member: Joshua Wimberley
Location: Odessa, TX
Reviews written: 26
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Always looking to improve my writing. Please leave comments if you think they will help!
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