My Honest Opinion About Life Insurance & the Different Ways to Utilize it
The Different Life Insurance Options
Are you confused by the different messages you receive about life insurance? Learn how life insurance can fit into your financial plan, whether it's a smart investment or something you should bypass.
I give you the low down on life insurance in this episode -
What the different types of life insurance are and how they work
How I use policies in my financial planning
Terms and phrases like "Indexed" and "Participation Rate" to look out for when shopping
Where to shop for insurance
There is no one-size-fits-all to any financial product, I hope you gain clarity by listening to this episode.
Time Stamps
00:00 Welcome to the Life Insurance Deep Dive
00:20 Understanding the Basics of Life Insurance
01:56 Term Life Insurance: What You Need to Know
05:29 Whole Life Insurance Explained
12:17 Navigating Universal and Indexed Universal Life Insurance
19:34 Concluding Thoughts on Life InsuranceGrant date, exercise day, and tax implications.
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Welcome to the Life Insurance Deep Dive
Hello everyone and welcome to the podcast. I am Michelle Moses, your host. I'm a certified financial planner, realtor, and former e commerce store owner. And today we are going to be talking about the most exciting topic of everyone's lives, life insurance. Uh, I obviously say that tongue in cheek.
Understanding the Basics of Life Insurance
Um, I have had a request for life insurance and I know everyone is super bored about this sometimes, but I also think that it's an important thing to know, um, because sometimes it can be an asset and it can be a very important asset in people's portfolio.
So I do think that if you have wealth and you are. So, uh, have your 401 K going, you have an emergency fund going, um, and you have kids. I think life insurance is worth looking at, and not only to just [00:01:00] give your money to your heirs. Um, so I do have some opinions about this, uh, obviously from, uh, doing this, I have been a financial advisor for 20 years, so I have seen people pay out on life insurance.
I've seen people stop paying on their life insurance, and I've seen some absolutely terrible policies. So I really am just going to try to keep this very simple. I'm not going to get into the bells and whistles because we all know with life insurance and annuities, they're so expensive. I think that's where people get overwhelmed.
Like, there's so many bells and whistles. You could have accidental death. You could have accelerated death benefit. You know, you can have all of these bells and whistles that you're putting on a policy. I'm going to pretty much keep it simple so that you understand the what's going on. ways that the assets can fit into your portfolio and what they're going to do.
Okay. Uh, so life insurance has, I'm going to say basically three different categories or four different categories, actually. So we're going to have term, which I think is the easiest to understand. Then there's [00:02:00] There's indexed, universal life, and then just regular universal life, okay?
Exploring Term Life Insurance: What You Need to Know
So we're going to start with the two simple ones.
The most simple one is term insurance. You're buying it for 10 years, 15 years, 20 years, all of those sorts of things. These are usually the policies that you see that people have, and then they turn 76 years old, and they're like, Hey, I've been paying on this this whole time, I want to keep it in place. Um, But it's going to cost me, you know, 2, 000 a month to keep it in place, um, which is cost prohibitive and you're not going to do it.
Uh, so that, but the term policies are what most people buy just to have some coverage for their kids. You know, your kids are born by a 20 year term policy. If something happens to you, then your income could be replaced. I do think it's important to also think about the mom and the dad. So if there is a stay at home mom or dad.
If something happens to them, you are going to have to pay for childcare. You're going to have to pay a lot for a lot of things that that stay at home parent is doing. So [00:03:00] I, you know, a lot of times in the past, what we've seen is covering only the person that is working outside of the home. Whereas I have the opinion that it's important to cover both because, you know, You are working in the home or you're working outside of the home, but both of those things are extremely expensive if you are going to try to replace that person.
Um, so term policies, that's, that's pretty much, you know, straightforward. You could go online and get those. Um, I do want to kind of dispel a myth too. Like a lot of people go online and buy these and, um, they are not less expensive by going to whatever it's called, insurance. com or anything. Um, Um, it's just that insurance.
com is the agent, just like I am an agent or any other advisor or insurance person is an agent. And, you know, I'm obviously biased because I like giving advice and being an advisor, but if you're going to buy a policy, I wouldn't buy it online so that you had somebody to [00:04:00] call and I wouldn't buy it through your PNC insurance.
Sorry, guys. Those, um, I think those tend to, and I would honestly, I wouldn't buy any life insurance through any PNC. Like, uh, you know what I'm talking about? I'm not going to name the companies, but, um, that's where property and casualty, where you buy your auto and home insurance. Um, those policies don't tend to, uh, perform as well when I get into some of these other policies.
So I would say if you're going to go with an insurance broker, uh, someone that can shop rates across multiple different, um, Different companies so that you're able to see, like this one has a seven year and this one has a 12 year, but this one is better. You know, so that way you're able to compare.
Whereas if you just go to the one company and you're just going to like State Farm or Allstate or something like that, it like you're only getting their insurance. But if you go to an insurance broker, then we can shop. All the companies and give you, um, the best rate [00:05:00] or the best policy and will oftentimes be like, well, this one has a bell and whistle bells and whistles that has this.
And, you know, like, because sometimes you can, um, have like a waiver premium on there. So if you had a disability, then you wouldn't have to pay your insurance until you were 65 years old. So there, you know, there's a lot of things that I think, um, an advisor can bring to the table and you're still going to pay the same amount.
So why not? Thanks. You know, support somebody in their lifestyle, uh, and then you also have somebody to call if something goes sideways.
The Ins and Outs of Whole Life Insurance
Uh, the other, I think, fairly simple life insurance is the whole life policies. So, these are the ones from the past. I should say from like the 1970s that people have been like the tried and true kind of things where you're paying a lot of premium, it gains a cash value inside of it and it becomes like an asset.
So your death benefit has to be a certain amount. You have to have a certain threshold over your cash value. Okay. So if you get a hundred [00:06:00] thousand dollars in death benefit, then your cash value is going to start growing as you pay your premium. It does take a couple of years for that to get started because you're buying a product, you're paying a commission, you're paying the company.
Uh, and so the first couple years are going to be eaten up by all those commissions. So remember, and I'm going to say this in a ton of podcasts, anytime you are buying a product, you are paying a person and you are spending money. Okay. So the cheapest would be buying like a term, you know, there's not a whole, there's no cash value.
There's, you know, it's simple. You're just buying the death benefit. And that's it with a whole life policy. You're going to pay, um, more. commission, you're paying more fees because they are investing your money in bonds and they're investing your money in the, in the assets of the life insurance company.
So your whole life policy is then you, you have it on yourself or your husband or wife or whoever, and it starts to gain, [00:07:00] um, cash value inside of it. And so as your death benefits going up, so is your cash value. And so. I like these because you can do some fun things with these and make these like a really cool asset.
I have some clients that have some rental properties and they had some cash. And so what we did was we, um, loaded it with a lot of cash value because it was twofold. She wanted to make that when she retired, she could you spend down some of these houses and sell them to live on, but she wanted her daughter to be able to basically inherit, you know, some of the wealth.
She didn't want to worry about, uh, her daughter not having anything and she just spent everything. And so life insurance was a great way to do that. But we also, Put a lot of cash into this whole life policy because she wanted cash to be able to borrow from, in order to pay for like a new roof or fence or something like that for, [00:08:00] um, for the properties that she owns.
So sometimes people use it kind of like as a savings account and the way that I use. It's a whole life policy, and it doesn't have to be, and we'll get into this, but it doesn't have to be a whole life policy, but I like it just because once these policies get going, I mean, they're making five and five and a half percent inside of them, and you don't have to worry about the stock market going up and down.
So, if you can think about all these different buckets, we've got like the stock market bucket, and then you've got your cash, and just like a high yield savings account, and then maybe you've got this whole life policy that maybe has, you know, Yeah, 100, 000 and in it, let's say, and then you're just paying the premium on it and it still has the hundred thousand, but obviously you start making that five, five and a half percent on that money every single year.
And it's just going to start building and building and building. And the idea is that when you get into retirement, you're going to, you can spend down all of your retirement assets. You could hopefully maybe, um, sell your house and downsize a little bit [00:09:00] and use some of that. And then you could also use the life insurance or you could go on to your heirs if you end up not using it.
So you can always take loans from these whole life policies. I am not saying, and this is why these whole life policies get a bad rap, is that they always compare them to the stock market. You are never, ever going to make as much in an annuity or life insurance policy, and I'm lumping these together because they're both insurance policies, as you are if you just invest in the stock market, but people don't always want to put all their eggs in one basket.
Okay. And so having these things spread out, it helps people, I call it just sleeping at night, it helps their stress levels go down and they know that I've got all of this stuff in my 401k and my IRA. And then I have, you know, my cash here that I can do, but I also have this cash and this whole life policy.
And if I want to borrow it to buy a car or to do something on my house, I've had people put solar on their house, buy a [00:10:00] car, all of those sorts of things. But you do have to pay it back if you take a loan and, and you like, because the idea is to have it for retirement. Right? And so we're just kind of using it as a savings account that you're making like five and a half percent on.
And you happen to get a death benefit from it that would be, you know. 10 times that. So that is kind of the overall of a whole life policy. Um, not, I should actually go on is that you can use it as an asset to qualify for loans. You can use it as an asset to, you know, borrow things and for, you know, buying houses and, you know, just all of these sorts of things.
Some people use them to fund college, uh, because they get the death benefit, but then they could also just take the money out because any money that you put into the policy, you can always just withdraw it. And it's. It's not a big deal, just withdraw it and then your death benefit goes down, the cash value goes down, it's, it's not a big deal.
Uh, but again, you are not going to make as much as you are in the stock market. So when you see those things online and they're [00:11:00] like, life insurance is a scam, don't let people do this. It's okay for the right person. And if you have enough cash to just put away in there, like I've used it for long term care insurance, people didn't want to buy a special long term care policy, but they just wanted to have some cash to the side that was making some money.
And if they needed it for long term care, then it was there. We did that for, I've done that for a couple of clients, um, cause a lot of these long term care policies, as you know, they do not pay out. I honestly, I've never seen one pay out, um, in a great way, so I don't really recommend them. Um, so, uh, this is what we've done on a couple of people is doing.
These whole life policies and we have what's called max funded them, which is putting some cash in for quite a few years. Um, and so these people selling these whole life policies are, they're not scammers. I think sometimes people, they say, put all your money in these. And you know, there, there are selling programs out there.
It's all [00:12:00] about balance. So if there's ever anybody that's like, you just need to do this and you need to like sell all this other stuff, then it's not the right answer. It is just all about balance and putting it in like as a puzzle piece into what you have going on as you're going up the levels of your business.
of your wealth.
Navigating Universal and Indexed Universal Life Insurance
So the final couple of life insurance policies are universal life and indexed universal life. So they're both very similar. So universal life policy is one where the premium is flexible. Um, and these get a lot more complicated. I often don't even, I mean, I have to like study, it's not that I don't understand, but I have to like really, really study these policies because they're so different from every single company that you go to.
Um, so universal life is one where you could start out paying 200 a month in premium and then, you know, later on you lose your job and you need to go down to 50 a month. It has that flexibility in it that you can [00:13:00] change that. Whereas with a whole life policy and term policy, if you don't pay it. It's gone.
I mean, with the whole life, you've got the cash value where you could pay the premium with the cash value. Um, so you, you got that going, but if you were to, to not pay the premium, then you could possibly, you know, lose the death benefit and the benefit of the insurance. Whereas universal life is just a lot more, um, flexible and you have all these options.
So you've got an option to like keep the death benefit the same, or you could have it increasing as you're paying into the policy. Obviously, if you want it increasing, your premium is going to be higher. Um, and then indexed universal life is the same thing where your premium is flexible, but you are invested in the stock market.
And this is where it gets really, really complicated because every company has their own investments. So it could be like the Symetra, you know, indexed S& P 500 fund. And that is specific to just that company. It's not, you know, You're not looking at the MFS fund where it's a company [00:14:00] that is available to everyone.
Um, this is a mutual fund that is only available inside of this policy. And this is where it gets super complicated of you don't know what you're invested in, you don't know where your money is invested, and then it has all these different, um, Terminology, things that say like, these are the participation rates.
So like if it's the S& P 500, right, it returns 10 percent last year. You're going to have a 50 percent participation rate and we're only going to look at it on November 1st of every single year. So from November 1st of 2022 to November 1st of 2023, it went up 10 percent and you have a participation rate of 50%.
You're going to make 5%, but it's, I'm simplifying it. It's a lot more complicated than that. Uh, and so I see a lot of these indexed universal life policies because the premium can be really, really low and you get the upside of the market. You know, some people [00:15:00] like them, especially the younger people, because they get the cheaper premium because it's a cheaper premium than what the whole life is.
But you get the, you know, that you get the benefits of the market. I really think you need to watch out for these and only go to somebody that you really trust. And that when you look at the illustration, it's showing that you're making money in the first three to four years, because sometimes, um, these life insurance policies, like I saw one and it had a 20 a 20 year surrender on it, which means that if you surrender the policy or you give it up in the first 20 years, you have to pay a certain percentage.
And what that means is that basically the commissions were super high. And so if your, if your, um, surrender rate is anything above, you know, like four to five years, I would say you probably need to look the other way. Um, and go another direction. And honestly, you shouldn't even be looking at life insurance if it's not a long term [00:16:00] thing.
Uh, it really is. I mean, it's a commitment and you're, you're deciding that you're going with it. It is an asset that you're going to have for your retirement or just to cover for your kids. And, uh, And, and go with it and that you can do it and you're going to figure it out of how you can pay the premiums if something does happen to your job.
So that's why I say that life insurance should be layered in after you have all these other things going so that you're not so like, Oh my God, I have to save for retirement and then I don't have a cash, you know, I don't have any cash in my savings account. And I get it if you've got little kids and it term is what you can afford.
Okay, great. You know, and you don't believe in life insurance and you're, you'd want nothing to do with it. You'd rather go into the real estate or, you know, something else. Sure. Go, go with that. Um, but I am just telling you how I fit it into my planning process. I barely ever use an indexed universal life or universal life policy just because [00:17:00] they are so complicated and it is very difficult to, to look at the, um, stock positions in them and to feel like that you're getting a good deal, uh, because a lot of them.
It just takes a long time to get your cash value up and you don't know if it's going to stay up and so if you do have one of these policies and you're looking it over, I would just look at and make sure that your death benefit can't go down and that your cash can't go down because if your cash can go down and you've been putting in 200 a month for 10 years, you're not going to really be happy with that.
Like to me, if you're going to buy life insurance, it's so that your money doesn't go down. That's what it's for. You know, you've got a death benefit and it's kind of like a savings account. If it's going all over the place and you got all these fees coming out all the time, because they're going to make their fee no matter what, and they are very high inside of there because the way that they're investing in the market is, you know, they've got a lot of bonds and they're paying people to buy all those bonds, but they're also buying a [00:18:00] lot.
Of, um, call it like covered calls and puts and things like that. Options on all of their stocks. And that's what makes it expensive is because they're buying all that. And it's just a fee like that. It's just just go off into the air. Um, so obviously I'm not a huge fan of all this index universal life. I feel like, um, it, you know, it's, it's great if you want a low payment and you can handle the ups and downs and you want to take that risk.
Yeah. That's wonderful. I'm just more of I use it in a different way to plug up the different planning pieces of my clients. And they seem to love it. I mean, the people that do it, they absolutely love it. It's, um, you know, I had another one where we use the whole life policy and we made it kind of like her 401k because she worked for herself.
And, um, at the time there were no individual 401ks. And So this is a while ago and it's been great. You know, they've been able to borrow from it to buy a house so that they didn't have to deplete their money because the policies that I do when you [00:19:00] borrow money, it still acts like it's still invested. So if you had a hundred thousand and you borrowed 50, you're still making money on a hundred thousand, even though you borrowed 50.
And my other advice is buy life insurance from a mutual company, not a public one. Mutual means that it's owned by the shareholders of the company. Uh, and I feel like they make better decisions, um, rather than giving your dividends and interest to stock holders like you see, you know, on the stock market.
Um, this is again, my opinion. Other people have different opinions. Um, and so. That's it.
Concluding Thoughts on Life Insurance
So that is basically life insurance in a nutshell. You've got term, whole life, universal life, and indexed universal life. Yes, there are different bells and whistles that you can put all of these because you can add, um, long term care writers onto some of this.
Um, so I'm, I'm really giving you just the, the basic nuts and bolts of it. If you have any questions, Please feel free to leave a comment, to, [00:20:00] um, text me, email me, cause I know a lot of you listen that, um, I know, I am happy to help, uh, any way that I can, even with policies that you already have in place, I hope that this has helped you, I am here, I want people to feel more free with their money, that is the whole point of this podcast, and I thank you for listening, so please subscribe, and scroll down, and give me a review, and thank you so much for listening, have a great day.
Disclaimer: The information provided in this podcast is for general informational purposes only and should not be construed as professional financial advice. Always consult with a qualified financial advisor or professional before making any financial decisions. The hosts and guests of this podcast are not responsible for any actions taken based on the information presented.