Should I Buy Life Insurance?

Do you need life insurance? Is life insurance a good investment? In this episode we cover all things life insurance so that you can make smart decisions about how to protect yourself and your family. We cover:

1) What is the purpose of life insurance?

2) How much life insurance do you need?

3) Term life Insurance vs. Permanent life insurance (Variable / Whole Life)

4) How life insurance is useful for business planning and minimizing estate taxes

5) How to find low cost term life insurance

Transcript:

Hey friends, welcome to another episode of the six figure investor today. We're talking about life insurance. So fun. I started off . Brian showed me his notes for the episode, and I started off by asking who needs life insurance.

The answer is everyone needs life insurance that is expected to provide income for their family, for their kids, for their spouse. If you're supporting someone financially and if you were to go away right, and stop being able to support them And that would be a problem. Then you need life insurance.

I think that means that most of you who are listening probably need life insurance. So today that's what we're gonna be diving into. That's right. All right, let's get it.

Hey friends, welcome back. We started off this show by saying, we were gonna talk today about life insurance.

And then if you have people who are dependent on you and your income, you need life insurance. And so that makes up the majority of our listener base. And today we're gonna be covering kind of the who, what, when, where, why, how. Right, right. Yeah. Of life insurance. Yeah. And, and just as a, as an aside, we don't the capital stewards, doesn't sell life insurance.

We don't have a skin in the life insurance game. We work with our clients to help them make smart financial decisions. And so we will guide folks through considering whether they need life insurance, how much they need, and then we can help connect them to, to places where they can actually go purchase it.

But we're not, we don't sell life insurance. And so we don't have an incident to sort of give people advice on, I. You know, that's that's other than what is in their best interest. So I just, I think it's important to kind of say that at the, at the onset. So there's a lot of myths and misconceptions about life insurance.

Why don't you start us off Brian, by just kind of laying the foundation on what is the purpose of life insurance? Why do we talk about this? Yeah. Insurance is a risk management tool. And so just at the onset, unless you have more than $12 million or you and your spouse have more than $24 million or you own a business and we can include things like substantial farmland and real estate in that business ownership.

Unless you're in those special categories, life insurance is a risk management tool. Only. It's not an investment, it's not a tax play. It's not a source of retirement income. All of those things, I've heard bad sales pitches on lately. And, and they're legally true. And there are things that you can do with life insurance, but almost.

Every scenario that I've ever seen, where we're trying to use life insurance as a tax player, and as a future investment comes out with lower returns and higher fees than more traditional investment options that accomplish those same objectives over time. So life insurance is about managing the risk that as we mentioned at the top of the show, you are not going to be around to provide for your family in the same way that you would, if you were still living.

All right. So you said that in life insurance is about risk management. What does that mean? What is the risk? Yeah. And so the risk is that something unexpected happens and that your income goes away, that's you die, right. Which is kind of morbid, but that's, that's the risk that we're managing for. If you're single or perhaps you're married and you don't have children and your other spouse is working, then maybe you don't need life insurance because if your income goes.

The, the lifestyle of those folks that you're supporting probably won't change all that much, but if you have kids or if you're a significant contributor to your household income, then the risk is very real. That something might happen down the road and your family would not be cared for if you didn't have life insurance in place. And it, public service announcement, right? I've never met anyone who says they're gonna be in a car accident today, or, in a skiing accident or any of the things that happen. Right. When, when. Folks die and you just don't know and that's gonna happen.

And so you have to plan for those things regardless of what your health situation is or what is going on in your life, because you just don't know when something like that is gonna happen, it's just the reality of the world that we live in. the good news is that term life insurance is usually pretty inexpensive.

You only need to carry life insurance until you've saved enough assets to become financially independent and support your family, IE, to be able to pay for college. To pay for retirement, pay off your house, et cetera. So that means if we're, if we're thinking about life insurance as a risk management tool that replaces your income, if something bad happens to you, then you probably just need a term policy into your fifties.

And not much beyond that because you're saving. Okay, clarifying question. I hear that word term life insurance. Yeah. Does that word term mean something special? Yeah. So there there's a couple, well, there's a lot of different kinds of life insurance that are out there, but you can really kind of divide things into term life insurance and then permanent life insurance, which is whole life and universal plans and lots of.

Type of plans. Term life insurance means that you're paying a premium and the insurance company is going to pay you a benefit amount, a million dollars, $2 million, $3 million. Between now and a set period of time from now. , you're gonna pay premiums for the next, you know, five years, 10 years, 15 years.

And if something happens to you over that 5, 10, 15, 20 year period, they're going to pay that benefit amount. The difference between term life insurance and permanent life insurance is permanent. Life insurance is intended to pay out. So the premiums are higher because those plans are in place until you die and they never go away.

And so a term plan will expire and that's okay. If a term plan expires when you're in your fifties and you're close to retirement, but you have savings to support your family and do all the things that you need to do. You don't need life insurance anymore. So that's okay. Those permanent policies are designed to be there for forever and never expire and never go away and provide those benefits.

Even if you die in, you know, of a ripe old age of 207. Wow. We're like with Thula now. So all that talk about term versus permanent insurance. Makes me wonder how much do I need? Yeah. So you need enough to replace the lost income that would disappear if something bad happened to you.

I like to think about it like saving for retirement or becoming financially independent. How much would you need to save to never have to work? A good way to think about that is to take your income and subtract the amount you pay in taxes and savings. And then divide by 5%. So we'll just kind of walk through an example.

So if you make $200,000 today and you pay taxes and save, you probably need to replace about $140,000 in income annually because. You make $200,000 and then you immediately pay taxes and you're probably putting money into 401k, right? Assuming your family could take out 5% annually without significantly drawing down principle over time.

That means that you need about 2.8 million in life insurance coverage to replace your income. I also like to add things on to that for college and weddings and things, big one time expenses that you know you're gonna have. So if you have a couple of kids and you're gonna send 'em to school and pay for a wedding, maybe there's another $500,000.

Now, a lot of times people say, well, I have a hundred thousand dollars or $200,000 or $500,000 of insurance. And you can see right there in that example, if you make a few hundred thousand dollars a year, you probably need a lot more than just a few hundred thousand dollars or a million dollars of life insurance to truly replace your income over the next 5, 10, 15, 20 years.

Yep. That makes sense. So, You mentioned Brian, that at capital stewards, you don't provide life insurance. You're not connected to any specific insurer. Yeah. But what do you tell your clients about where to go find a provider? Yeah. So the very first place you should look for low cost term insurance is through your employer.

Oftentimes you'll be able to purchase life insurance and, and when you go through the employee benefit cycle every fall, you'll see something like, you know, maybe we give you life insurance up to the amount of your salary, and then you can buy 1, 2, 3, 4, 10, 15, whatever they are. Times your salary from your employer.

And if you can buy life insurance from your employer, that's probably the lowest cost insurance you're ever gonna get., and a lot of people can't buy enough insurance through their employer to cover that total amount that they would need to replace their lost income. so I would start there and then if you can't get life insurance through your employer, then you can go seek out the various different insurance firms that are out there and buy a policy from an insurance.

Talk a little bit about folks who have maybe. Financial responsibilities outside of caring for dependence or family members. Like what about people who have more assets or business owners? How should they think about this process? , I know when we started this process, we sort of said, Hey, if you own a business, or if you've got more than $12 million or more than $24 million, we're gonna kind of put that to the side.

And if you're. Not one of those people, then term insurance is what you need. Well, if you are one of those folks, if you have a, a potentially taxable estate, and what that means is you have more than 12 million, or more than 24 million. If you're married life insurance is one way to move money out of a taxable estate.

And so that's where those permanent policies are. Universal life insurance policies might be used. You pay premiums over your lifetime, and then at your death, those assets passed. To the beneficiaries of the life insurance policy or the people that you want to pass the money to without going through your taxable estate.

So it's worth asking your financial advisor and an estate planning attorney. If you have those kinds of assets, if life insurance might be something that would be beneficial to help move money out of your estate. The other group of folks that might carry a permanent life insurance policy that doesn't expire as business owners.

And if something happens to one partner in a business life insurance might be used by the remaining partner. To buy out the deceased partner that helps your family. When you pass away, have liquid assets, which might be needed because you're no longer there working in the business. And it also ensures that the, the surviving partners or business partners have the financial capacity to pay your family, what your share of that business was worth.

If they want to do that a lot of times, maybe your spouse or your children don't want to just sort of assume your partnership in the business, right. And start working there. But they're stuck because maybe nobody has the ability to buy them out. So life insurance can be owned by the business can be owned by individual partners in, in a partnership, but it can be used to.

Affect transitions in a business when something happens. And so those are the two caveats to having term insurance, if you own a business or if you potentially have a taxable estate, that's where permanent life insurance, universal policy might be beneficial. Again, those are scenarios where you need to talk to your financial advisor.

You need to work with an estate planning attorney and make sure that the structures are all set up the right way. But those are places where that can be valuable if you aren't in those two categories, if you don't own a business, if you don't have a taxable. Then you need term life insurance. It's important to have it.

It's important to have enough of it. But also don't get sold on other types of insurance, sort of that are related to investment ideas. Because those things are usually expensive. They're subpar compared to other options. And once you hit retirement, it's okay. Not to have insurance. It is. Okay. That when you pass away, you don't have insurance to pass down to your hairs.

The, the people that you wanna pass money to will appreciate having any remaining assets that you have when you're gone. There's no magic about having an insurance policy in place, just because, so you buy a term policy when you're in your twenties, thirties, and forties. You save assets while you're saving for retirement.

And then that policy will expire in your fifties or sixties. And that is okay. I think that's the big unlock for most of the people that I hear you talk with about this, that you don't have to have a life insurance policy until the day you die. No matter what that's correct. Yeah, you, life insurance policies are there to manage risk.

They're there to be there for you when you don't have the financial capacity to support your family. And so once you hit that day where you've hit retirement or you've got enough money to become financial independent, you don't need life insurance anymore. It's almost, it would be better named income insurance.

That's actually, that would be probably more intuitive, but it's not. So, like I said, Term insurance is really important as a risk management tool while you're working while you're supporting your family. When you don't have a lot of assets, as the asset level goes up, your need for term insurance will go down.

And then if you're in, like I said, that category of people where you have a taxable estate or you own a business, maybe some other life insurance type products make sense to, to work in some of those unique situations. Great. Well, thanks for joining us friends for another episode of the six figure investor.

Hopefully you found today's conversation about life insurance, enlighting and helpful. And if you did, please go give our other episodes a listen and leave. Brian, a five star review hearing from you helps us know what to talk about next. Yes. And we promise we won't talk about death on any more of the episodes for like the rest of the year.

Okay. Only until the rest of this year. Yeah. We've reached our, our morbid next year. Next year. We, our morbidity count starts over next year. That's right. We might have to talk about insurance again. Oh gosh. All right. Well, five for now, friends.