Life Insurance

At Insurance That Fits we know everyone needs life insurance.

We also believe everyone needs affordable life insurance. Our philosophy is not about selling you every cent of coverage we can ring out of your wallet, but instead to get you the right policy to fit your needs.

 

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 tends to be more educational, here’s some of the financial problems this product can address, what do you want to do.  To challenge someone as to how much life insurance they wanted to buy was generally in the realm of what I considered to “salesy.”  There was a context though.  It was only a few weeks before that I had sat down with a widow to help her with health insurance when I found out her husband had died just a week before.

There had been left behind $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 debt then the remainder would only create and income stream of $12,500.  If she 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 and it would make a major difference.

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 I understood what I 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 for our kids 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?

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 also 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.  Second, 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.

It is this factor that many people take exception to but think of is 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” company for guaranteed issue policies is Gerber Life and for underwritten small policies is Shelter Life insurance.

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 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.   This could be for renovations to make a bathroom handicap accessible or for long term care.  It could be for travel to an out of state hospital for cancer treatments.  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

When you put all that together what you can see is that there needs to be a life insurance policy there to 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.

The most 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 “go to” strategy for Guaranteed Universal Life (GUL) policies is to match up the underwriting standards of a company with your health history.  Not every company looks at high blood pressure the same, or cholesterol levels, or a cancer from nine years ago.  One note, the “guarantee” in a GUL policy is different than the guarantee.

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 policy was to pay off the building if something happened to me as I was going to be the one running the business in that location.  This is a common business use of life insurance.

The second policy I bought 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.  I’ve read lots of Dave Ramsey’s books and have been through financial peace university.

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 are younger and have kids at home.

I Have Three Policies

I’ve already discussed how I got my third policy.  Now at 49 years old I am uninsurable.  Last year (2017) I tore an 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 was small and didn’t even 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.

Two of my preferred companies are Ohio National and National Life Group  (NGL) for term insurance.  They have great rates and Ohio National and NGL both have solid conversion options.  Conversion options are something that no one wants until it turns out they are uninsurable 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 shareholders.  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 other option to a mutual life insurance company is a “stock” life insurance company.

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 or 5% loan vs 20 – 25% in taxes is a big difference.

Plus, some companies they are not loaning you “your” money.  They are loaning you their money.  This is an important distinction.  Remember, the extra money the mutual insurance company makes gets paid back to their shareholders.  If the load would come out of your money it would reduce the amount they add to your cash value and death benefit.  If it comes out of their money then your account is still full and gets the full impact of the additional pay in.

The Cash Value of Life Insurance as an Emergency Fund

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.

Again, you can take the funds out as a surrender or a loan.  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 instead of a GUL.  As I mentioned above a GUL is a permanent life insurance policy, but it might not have any cash value in it so it won’t be of any use as a emergency fund.

The Cash Value of 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.  The next year the stock market goes back up 10%.

A Down Economy can Kill a Nest Egg

Do you have your original $100,000 back?  No.  Ten percent added to $90,000 is only $99,000.  What I am trying to show you is that dips in the market have a big impact and the growth back has to be greater than the dip just to get you back to even.

 It gets worse though.  If you are taking out $6000 a year ($500 a month) to augment your Social Security and pension at the end of year one you don’t have $90,000 in the account you only have $84,000 in the account.  To get back to $100,000 you need to be able to grow that nest egg by nearly 20%!  The thing is you also need the cash…that $6000 a year you were augmenting your income with.  What to do…what to 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 you can pull the cash out of that policy.  Since you did get that policy now you can pull $4800 out and let the money in the nest egg “rest and rise.”  Wait, wait, wait!  Did I say $4800 instead of $6000?  Yes, I did.  Why?  Because when you pulled that $6000 out of your nest egg you paid taxes on it (roughly 20%) and 20% from $6000 is $4800.  You can pull out the $6000 if you like and you will really have more spendable income than you generally do.  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.  I also have plenty of clients that annuitize part of their nest egg to provide another stable source of income.

In addition 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.

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.  With Whole Life the policies build cash value both through your premiums and what the company pays in.  With Universal Life it is based on what you pay in and what is going on with 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 mutual life 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.

These short pay options are obviously just premium paid in advance, but there are advantages to that.  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.  Just as our income goes down to have this bill for life insurance go away as well is a good thing for many budgets.

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.  For more information on Long Term Care and Long Term Care Annuities see the these articles.