Berko: Buying late-term life insurance
Friday, March 22, 2013 7:00 AM
Dear Mr. Berko:
I will be 73 soon. I’m in perfect health and a nonsmoker, and for reasons I can’t disclose, I have to purchase a $1 million term life insurance policy that is in force by the end of next month. I will need this insurance to last for six years. A young man, employed by a very well-known insurance company with a top A.M. Best ranking (A+), has offered me a 10-year level term policy (though I only need it for six years) for a premium of $1,678 a month. Having never bought insurance before, I need to know whether that is a good rate.
And last year, you recommended Lucent Technologies Capital Trust, a 7.75 percent cumulative convertible preferred trust, at $700 a share with an 11 percent yield. I didn’t buy it, and it’s now $925 and yielding 8.3 percent. Is it still a good buy?
F.D., Vancouver, Wash.
Most folks don’t need life insurance until it’s too late, and by that time, the costs are too high. Insurance premiums, especially term life policies, are not etched in stone. And I’m certain that the $1,678 monthly premium this young man pulled from his laptop is too bloody high. Insurance premiums vary with the insurer, and the differences can be quite substantial for identical coverage. Term insurance is basically uncomplicated, with very few moving parts, so it makes good sense to shop rates.
I’m not comfortable using a neophyte who has been in the business for only a few years and is employed by a major insurer. Most young lads don’t have sufficient knowledge or experience to provide you with the best advice you need. Meanwhile, agents employed by a classy company such as New York Life, Northwestern Mutual or MetLife are obligated to present their company’s policies, which usually have hugely higher premiums than policies from their smaller, lesser-known brethren. And a top A.M. Best rating isn’t worth the hoopla it boasts about. An A+ rating is one notch down from the best (A++). But I’m comfortable owning a policy with a B rating, which is still considered “fair.” Frankly, I’ve never known an insurance company that has failed to meet a life policy claim. So if this young man had a bit more spit behind his ears and were an independent agent, he might be able to show you a policy from American General Life that would save you some big bucks.
American General Life (A-rated by A.M. Best) can give you a 10-year level term policy for a premium of $1,136 a month. However, the issue of the policy is contingent on you passing a physical exam, with a caveat that you are not engaged in a hazardous occupation, such as one working covertly for the CIA in the Middle East or training alligators to sky-dive. That’s a savings of $542 a month, or $39,024 over the six-year time frame. And sometimes a good agent can work with the insurer to give you a lower rate than the published book rate. I also believe that there are other decently rated companies with lower rates. So go back to that young man and ask him whether he can shop around for a better deal.
Lucent Technologies (LUTHP-$909), once the pride and passion of AT&T, is now owned by Alcatel-Lucent SA (ALU-$1.49), a French communications company based in Paris. It’s convertible into 40.366 shares of ALU at $24.80, and I think the Red Sea will part again before ALU reaches $24.80. At $700 a share and yielding 11 percent, this triple-C-rated issue was an attractive speculation. At the current $909 price, the yield is a much less attractive 8.5 percent, and I don’t feel the risk is worth the potential reward, even though the issue matures at $1,038 in 2017. I’m just not comfortable making any investment that smells French. Rather, consider some pipeline master limited partnerships with modest to good principal growth and 7 to 9 percent yields that are mostly nontaxable.
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