Life Insurance

At Insurance That Fits we know everyone needs life insurance

What will that do for your family?

I just straight up asked the client that question. “What will that do for your family?” It was in the middle of an appointment for life insurance and the prospective client asked for an estimate for $125,000 life insurance policy. This question popped into my mind and just popped out of my mouth. “What do you think that is going to do for your family?”

He was surprised at such a direct question. I am usually hesitant to ask such pointed questions. My sales methodology is more educational. People often need help understanding the financial problems the product can address. I help clients understand the difference between companies and products. What I don’t usually do is to challenge someone as to how much life insurance they wanted to buy. To me that is kind of what I considered to “salesy.” I don’t like being “salesy” or pushy.

How Much is Left after the Debt and House are Paid Off?

There was a context though. A few weeks before that I had sat down with a customer to help her with health insurance when I found out her husband had died just a week before. I was floored!

There had been $500,000 from a life insurance policy and she thought she was going to be fine financially. However, with a house payment, a car payment, and two kids at home that half a million dollars would not last long. If she used some money to pay off the house and car (debt) then the remainder would only last a few years.

Will What you Leave Behind Create an Income Stream for your Survivors?

She could invest the balance and live off the interest, but the balance would only create an income stream of $12,500. If she didn’t pay off the debt and tried to turn the whole thing into an income stream it would only be $25,000 a year. That was far less than they were used to living on..

Right then at that table I realized I had a similar circumstance. I had just a tad more life insurance than the husband/father who died. My kids were smaller than his and if something happened to me…well what kind of burden I was going to put on my wife and kids? I went out and secured a $1,000,000 policy on top of what I had.

My number is $1,650,000 what is yours?

Many people are shocked that I have $1,650,000 of life insurance. They shouldn’t be. If some is set aside for college and some pays off debt then that might leave around $1,000,000. That’s still a lot of money right? What if my wife uses about $70,000 a year for living expenses? Then the money last about 15 years and then its gone. By that point the kids will be out of school, but my wife will only be in her 50’s. What is she going to do for income until retirement and then during retirement?

Instead of using the cash she could invest the cash and live off the income. $1,000,000 will only generate $35,000 to $50,000 in income most years. That’s not a lot of money. My having $1,650,000 in life insurance is NOT some sort of crazy amount. I hope you can see that.

Now I ask everyone…what do you want your life insurance to do? Whatever the solution it needs to fit the need and fit the budget.

Burial Life Insurance Policies or Final Needs Life Insurance

If you are just looking to pay for funeral expenses you might just need what is called a final needs policy (or burial policy). These are small permanent policies (generally $5000 to $15,000). Often, they are taken out later in life (during retirement) or sometimes a grandparent will buy a policy for a grandchild. While some of these policies are underwritten (that is they can ask health questions and do physical exams) many are guaranteed issue.

Guaranteed issue means that there are no health questions or exams. This is great news for some, but there are two drawbacks. First, because the policy is guaranteed issue they are more expensive. Secondly, if you die in the first two years of the policy often all you get back is your premium paid to date. Many companies will also pay out 10% on top of the premiums paid.

I urge people to think of that two year period this way, “Where else can you put your money and get a guaranteed 10% return?” These are good policies when they are needed. My “go to” companies for burial/final needs policies are Family Benefit, TransAmerica, and AIG.

The Need for Permanent Life Insurance

There are three really disturbing statistics that lead me to believe that everyone should have at least $50,000 to $100,000 in permanent life insurance. The first is that within 10 years of retirement for the primary income earner in a family less than $140,000 have been saved for retirement. What this data point tells us is that for most families their retirement nest eggs are very modest.

Another statistic is that in the last few years of life the majority of people will spend $50,000 over and above what Medicare (and/or related policies such as Part D plans, Advantage Plans, or Medicare Supplements) pays on healthcare. It could be for renovations to make a bathroom handicap accessible or for long term care. There are a lot of health-related expenses that are not covered by Medicare. This tells me there is going to be a significant reduction in those modest retirement funds.

The final point is that when one spouse dies the household expenses are not cut in half. They generally only drop about 25%. Think about it. Utilities will cost about the same. As will property tax, homeowner’s insurance, and more. In addition, with one spouse’s passing there is a loss of Social Security income.

Life Insurance Can Make Up the Gap

A life insurance policy can help make up the gap. The combination of modest retirement funds, a chunk of those funds going to non-covered health related expenses, and a significant reduction in income after the passing of one spouse conspire together to almost demand that a life insurance policy be in force.

An effective way to fill that gap is with a Guaranteed Universal Life (GUL) policy. A GUL is often referred to as “Permanent Term.” Where as most permanent life insurance also has cash value a GUL rarely does. The main thing is that a GUL is generally the least expensive permanent policy you can find. IF the main concern is the coverage amount and not cash value or long-term care benefits it is tough to beat a GUL policy.

My “goto” company for this kind of policy is Midland National Life.

Term Life Insurance is Important for Young Families

At the end of the day permanent policies are more expensive than term policies. Every single dollar of my $1,650,000 in life insurance is term life insurance. That dollar amount is spread over three policies that I acquired over the years.

My first policy was a $150,000 30-year term. I got that policy when I joined the family retail business. The first policy was to pay off the building we purchased for the business if something happened to me. We had two retail stores and I was going to be running one of the locations. If I wasn’t there that debt needed to go away. This is a common business use of life insurance.

The second policy I purchased when we started having children. I was making about $50,000 a year and had read Dave Ramsey’s books where he advises people to get a policy that is 10 times their income. So $50,000 in income and 10 times income is a $500,000 policy.

Dave’s Advice is Very General

Dave gives great advice for getting out of debt. A lot of his further financial advice is just too general for me. As the disclaimer states on each of his broadcasts your situations are fact dependent and you should talk to someone who knows what they are doing before making financial decisions (or something like that). I know from experience that ten times income on term life insurance is generally just not enough when there are younger kids at home.

I Have Three Policies but am now Un-Insurable

Above I already discussed how I got my third policy. Now at 51 years old I am un-insurable. In 2017 I tore an artery (it was called a “dissection of the celiac artery” and in the CT imaging they did to find that they also found a tumor on my kidney. The artery healed fine and the tumor (renal cell carcinoma) was small and didn’t require invasive surgery to deal with. My point in telling you about that is that you never know when some health event will end your ability to secure a policy. So if you need a life insurance policy get it before something happens!

Conversion Options

Two of my preferred companies are Midland National and National Life Group out of Vermont for term insurance. They have great rates and solid conversion options. Conversion options are something that no one wants until it turns out they are un-insurable 15 years down the line, then they suddenly become very interested.

You don’t have to use the conversion options, but makes sure it’s an option for down the road. What they allow is for you to convert the term policy to a permanent policy without having to be underwritten. Many companies offer conversion, but often the policy they convert into is not a great option. Ohio National and NGL both have solid conversion options.

Whole Life Insurance during Retirement

For some situations I like Whole Life insurance over Universal Life Insurance. Whole Life builds cash value, has stable, level premiums and it is just rock solid. Depending on the insurance company the policy can build substantial cash value. With most life insurance that are “mutual” life companies they pay their profits back to their policyholders. What this does is to grow both the cash value and the death benefit of the policy.

You will hear some insurance agents or financial advisors talk about using a Whole Life policy to augment income during retirement. Here’s how that works. First, you need the right policy. In my opinion the right policy is a whole life policy with a mutual life insurance company. The option to a mutual life insurance company is a “stock” life insurance company.

Loans vs Surrender

A stock company has stockholders and it is they who get the profits, not the policy holders. Second, when you retire and you pull money out of the policy it can be as a loan or a surrender. A surrender will permanently lower the death benefit of the policy. If you take the money out as a loan you can repay it and then the death benefit is not altered.

Would you Rather Pay Taxes?

One might ask, “Why should I take a loan out on my own money?” The answer is two-fold. First, you don’t have to take the loan. You can take the surrender and there is obviously no interest…but there might be taxes due depending on how much you take out and how the insurance company accounts for it. With a loan…there’s no taxes. Yes, there is interest, but a 4% loan when your money is still earning 4% vs 20 – 25% in taxes is a big difference.

Unstructured Loans

So that is how the cash value can come out of your account during retirement, but then there is another question…WHEN should you take it out? There are three general uses of this type of policy in retirement. First, is simply as an emergency fund. Just because you are retired doesn’t mean that one day the roof won’t need to be replaced. Life happens and even a small policy ($50,000 to $200,000) can be a godsend when you need to get some cash for emergencies.

If you take the money out as a loan it is what is called an “unstructured loan.” That is, you do not have a loan application like at a bank. You do not have regular monthly payments you have to make. You do not get late notices if you don’t pay on time. You pay what you want, when you want, or nothing at all. What ever is left over will come out of the death benefit.

For this kind of policy, I would use a whole life policy typically from Ohio National Life Insurance Company.

Life Insurance as an Income Buffer for Market Investments

A second use of the cash value from a life insurance policy during retirement is as a market buffer. Let me explain that. Let’s say your retirement income is made up of Social Security, a small pension, and money you are drawing off of investments. The Social Security and pension are secure and stable. What is happening in the stock market will make no impact on them.

The money in your investments will be heavily impacted by what happens in the stock market. Think of this. Let us imagine you have $100,000 in a mutual fund that tracks the S & P 500. We are going to imagine further that the market drops 10%. Now instead of $100,000 you have $90,000. If you usually take $500 a month from your investment now you are down to $84,000.

A Down Economy can Kill a Nest Egg

You can see a down economy coupled with regular withdrawals will kill a nest egg. Even if the S & P went back up 10% the next year you are still down significantly. $84,000 x 10% = $92,400. Still way down from the $100,000 you had the year before and you still need to be pulling $500 a month out to augment your Social Security. So what do you do?

The Earlier you Secure your Whole Life Policy the Better

IF you had the foresight to secure a good whole life policy when you were younger now you have options. The $6000 you need ($500 a month x 12 months) can be pulled out of the life insurance policy instead of the nest egg. The nest egg gets to “rest and rise.” It is resting because you are’t pulling $500 a month out of it and it is rising as the market comes back.

Let me be clear you never know when the market is going to dip. You can start using this technique as the market goes down or you can start using this technique when things bottom out. That is your call. The point is to have access to cash you can live on while you let your market investments grow again.

The Cash Value of Life Insurance as an Income Stream

Depending on your income needs and the size of the policy you can also use the cash value as a direct source of income during retirement. Many people have a mix of income during retirement. Earlier I mentioned Social Security and pensions. It’s rare that I see a large pension, but I still see smaller pension payouts of $200 to $800 a month fairly frequently.

To any of those streams of income you can add the cash from a life insurance policy. Depending on the size of the policy and the amount you want to withdrawal you could have additional income for 20 years and still have a sizeable death benefit left to pass on. My preferred insurance company for these types of policies is Ohio National.

Universal Life Insurance

I mentioned Whole Life insurance and earlier in the article Guaranteed Universal Life Insurance. There is also plain old Universal Life Insurance. These policies are marketed as flexible policies. You can pay more in one month, less in another month, or even skip a month here and there. What you don’t pay will be taken out of the cash value and you can pull money out just like you can a whole life policy.

Part of the idea with Universal Life Insurance is that the internal cost of the insurance is less since there are fewer guarantees. Whole Life the policies build cash value both through your premiums and what the company pays in. Universal Life it is based on what you pay in and what is going on with interest rates.

Neither you nor I can Control interest Rates

Neither you nor I can control how much a company makes in profit or what happens with interest rates. However, most of these Whole Life mutual insurance companies have paid their policy holders every year going back even before the Great Depression. They can control costs and rates and there are just more guarantees on the whole life side of these permanent policies. If everything goes as planned it is true you should be able to build up more cash in a universal life policy. I for one don’t think things usually go as planned.

I will reiterate what I mentioned before. A GUL (Guaranteed Universal Life) policy is guaranteed to be there as long as you pay the premium regardless of what happens to the cash value. It is the least expensive way to fund a permanent death benefit…but it’s not good for cash accumulation or any of the strategies I mentioned for using life insurance in retirement.

There are even more options in Indexed or Variable Universal Life policies.
There hasn’t yet been a discussion of “Indexed Universal Life” policies or “Variable Universal Life” policies. Again, these policies could outpace the growth of a Whole Life policy. But they might not. Many companies sell these policies including some of the companies I use. They all advise reviewing the policy annually to make sure it is building cash as projected.

Do you want to sit down with me and review your policy every year? Would you like to find out 5 years into a policy it isn’t building cash like it should and you need to increase your premium? I don’t want to have those meetings so I don’t sell those products.

Short Pay Options

Most life insurance companies will offer what are called “short pay” options. What does this mean and what is the benefit? It means you pay for only a limited period of time, but the policy stays in effect after that. For instance, let us say a 47 year old secures a whole life policy and takes the pay to 65 option.

That client would pay the premium from the time they get the policy to the time they turn 65. After the age of 65 there are no more premiums but the policy stays in force. There are generally 10 pay and 20 pay options as well. Those options would require payment for a set 10 or 20 years.

The primary advantage is that after the age of 65 (or other option timeline) you don’t pay any more premiums. At retirement most of our incomes will go down. This solution matches that reality. The income goes down, and the bill goes away.

Life Insurance with Long Term Care Benefits

I’ll bet you didn’t know there could be so much to life insurance, did you? Well, as luck would have it, I’m not done yet! What is the biggest drawback to Long Term Care insurance? It is that it is insurance for Long Term Care. Just like your homeowner’s insurance or your car insurance there is no death benefit. If your house never burns down or your car never crashes the only benefit was that you were covered financially if something had happened…even if it didn’t.

For almost everyone I talk to about LTC insurance that is the biggest hang up. What happens to these big premiums I am paying in if I never used the policy?

Along comes a solution based on life insurance. If you don’t lose it there is a benefit paid out to your beneficiary. The long-term care benefits in many cases are virtually identical to traditional long-term care as well. You might here someone now and then talk about “asset based” long term care. What they are talking about is life insurance and/or annuity based long term care.