E10 - Life Insurance

Jerry talks about the main types of life insurance and explains how they work.

Transcript

Speaker 1: 0:23

The best thing, but you can give them to the, Your gimme such, but you love don't pay my bills. I,

Speaker 2: 1:05

Hey, everybody, welcome to the pink money podcast. I'm Jerry. And on this podcast, we talk about all, about things, really to money from a gay perspective. And today we're gonna talk about life insurance. I know that's everybody's favorite topic, right? And I know that everybody rushes out to go buy it right. Wrong need. They're a true, nobody ever wants to talk about life insurance and they certainly never want to buy it. And I think that's kind of a disservice to yourself and to a lot of people, because it's really one of the most important aspects. I think about estate planning and about making sure that you have your eyes dotted and your tees crossed, because when you're thinking about life insurance, really what you're thinking about taking care of other people. And even if you don't wanna take care of people per se, then you can even take out life insurance to fund your favorite cause or charity. Like maybe you wanna leave money to the humane society or to the red cross or whatever it is. It can be done in that sense. And I don't think a lot of people, some times think about it for those reasons, but it's definitely one of the most useful financial products I think that you could ever buy. And the thing about life insurance as well is that you really have to buy it when you're young and in good health, because the older you are and the worst health you have, then it's gonna be a lot more expensive or you're not gonna be able to get it at all. There's a lot of reasons why you might be able to get life insurance later on, especially if let's say you have some underlying health condition that could prevent you from getting it, like maybe you have asthma or your depression or sleep apnea or any number of health issues that the insurance company might just say, no, forget it. And then that's a real problem for you, right? Right. Because especially when you need it and you cannot get it, then you're gonna have to save for it. And that could be really rather daunting because if you need life insurance, let's say at your demise to pay off your house, your car, your debt, and you want to money from, for your survivors like your spouse, or maybe you wanna put your children through college that is gonna require a hefty amount of saving. And unless you're a really, really good saver and you have a lot of money, you know, you're making a really good salary. Usually life insurance is the best way to do it. Okay? Because if you think you need a million of life insurance, it's gonna take you quite a while to save up a million dollars worth of, you know, savings, to pay off everything that you want to do. And like I said, the older you are, then it's just gonna become more expensive for you and health wise, just as the bottom line, you need to have good health. Now, often when you see life insurance age and they start quoting you on life insurance, usually they're gonna make it the most attractive for you to buy because they're gonna give you some of their best rates. And that's, you know, like their ultra preferred rates. And that's means that you're in perfect health. Most people are not in perfect health. Most people are a little bit overweight or most people smoke or they have high blood pressure or they have high cholesterol. All those things are gonna knock you out of the ultra preferred rates and down to preferred or could knock you even standard or substandard. And it could be that you participate in some kind of activity that is worrisome to the insurance company. Maybe you scuba dive or you, you know, jump outta airplane or you race motorcycles, all kinds of things could be worrisome to the insurance company, right? Because they're risk adverse. They don't want to ensure people who they may end up having to pay this policy on sooner, rather than later, they're banking that you survive versus die because statistically, of course, there's gonna be people that die tomorrow, but they're hoping that you don't die for a number of years because you're gonna pay on this policy and keep paying on it and keep paying on it hopefully forever or at least until the term runs out. So speaking of term, there are really two different types of life insurance policies that you can take out there's term or temporary insurance, which lasts for a set number of years like 10, 20, 30 years, and there's whole life or permanent insurance. And as the name implies, it covers you for your entire life. Usually to age 100, a lot of policies nowadays will pay out to age one 20, cuz people are living longer. And so with longevity, they wanna make sure that they're not paying out too soon. So what that also means is a permanent policy. It does last your entire life that also builds up cash inside of it. So as you pay your monthly premium, you're paying for the cost of insurance, but you're also building up a little bit cash inside of the policy. So let's just say that, uh, you you've had a whole life policy for, you know, 10 years and then you die and you have, you know,$5,000 inside of it. Then it will pay out that$5,000 as well. Plus if there is a situation that occurs that let's say you wanna borrow some money for you don't want to go to the bank or what have you, you can borrow against your life insurance policy and take out, you know, 1, 2, 3, 4, 5, whatever of the cash value inside of it. Usually they won't let you take all of it, but you know, they'll let you take a, a substantial portion. Now that's just a helpful thing, right? Cuz then you're just borrowing money from yourself. Now, if it's a term policy, that means let's say you have a$250,000 policy for 20 years and then you wanna borrow against it. Well, that's not gonna occur cuz there's no cash inside of it. You're paying for just pure, simple life insurance with a term policy. It covers a wide variety of expenses. Use a large amount of expenses for a certain number of years because when you're younger, generally you need a larger amount of life insurance because you're just getting started in life and you have a lot more expenses. So you, you recently let's say got married and you guys got a house and car and maybe you have children in and you're thinking about paying for college and you're wanting to make sure that your spouse is, you know, able to live the life that you've grown accustomed to. If you're not around all those things, take a substantial amount of money. So let's say you need a million dollars worth of life insurance. You can take out a million dollars worth of term, cuz it would be pretty unaffordable. Let's say if you take a million dollars for a whole life policy, most people would not be able to afford that. So usually a term is the best way to go. But like again, the name implies, they're only gonna cover you for a set number of years. And then once that timeframe ends, your life insurance is over. You don't have any more life insurance. That term is gone. So you either have to take out a new policy and not even assure you as long, your health could have declined. So you might have to pay higher premiums. Definitely you're older. So your premiums are gonna be higher, cuz older you are the more you're gonna pay. And that just means again, that term may be helpful for you, but it can be unaffordable for you later on in life. It may be again the best, uh, choice when you're young in life, life usually, you know, you see all those ads all the time that if you're in great health and you're, you know, 30 years old, then a palsy, a million dollars will cost you like 20 bucks a month. Yeah. Great. As long as you're in really good health. And then again, it's only gonna last you for a certain number of years and that's fine because it does what it's supposed to do. Right? Provide a large amount of money when your fat really needs it. You die unexpectedly. Then you wanna make sure your family is taken care of. And the permanent policy, generally people will buy that either alongside of a term policy. Because again, it has that cash value, but really for the main reason that it lasts your entire life and people like that. Because when you ultimately let's say later on in life, 60 seventies, eighties, what have you, then there's always liquidity that's needed for your executor to sell your state. There's usually some credit card debt that's left over. They have to pay the funeral home. Maybe they need some cash to settle the, uh, state sale from all the, you know, clearing out your house and whatnot. So there's always cash that's needed and that cash is just helpful and it can be paid to your state. So again, your executor can settle your estate for you when you're deceased. That being said strategies based on your beneficiaries of how it pays out, because life insurance does not go through your will, meaning they will read your will and say, well, who gets this life insurance policy? Usually when you take out your life, I policy, you will automatically name your primary beneficiaries and your second dairy beneficiary. So if the first beneficiary is no longer around, then it goes to the second one. Also, if you've named children as a beneficiary, no life insurance company will pay out a policy to minors, right? Cuz they're minors. They can't handle things for themselves. They have no ability to sign any kind of contractor or anything. So generally again has to be a guardian who is going to essentially handle the money for the children. Now their guardianship is how it goes into your will and it that dictates who's gonna raise your children. Who's gonna handle their financial affairs for them. And there's all sorts of different strategies. You know, whether the money goes into a trust for them or again, the guardian, you know, is able to handle this money for them. There's just things that you want to think through. You usually want a good estate planning attorney to help you think through all these things and put the proper language and documents in place. So all this happens and especially if you have, let's say a special needs child, you can set up a special needs trust for them. Maybe you want put some and provisions in a trust as well for your children that says, Hey, I'm not gonna give you a million dollars from the get go. Maybe I'm gonna have you get X number of dollars at certain levels. Like maybe you want to give them X number or dollars when they graduate high school X, when they turn 25, when they graduate college X number, when they are 35 and by the first house, whatever, those are all things that can go into that strategy that you put in place with the trust document or again, and your will, all that can happen. You just need the right language again to make all this happen. And one of the things where I'm gonna do is bring on an estate planning attorney that we can have a deeper conversation about how some of these things work. I think it'll just be really helpful. But today again, we're gonna just keep it kind of high level because we're just talking about again, life insurance in a general sense. So going back to life insurance, we have two different kinds. We have term insurance, temporary insurance, and then we have permanent insurance, like a whole life policy. Now, permanent insurance, like I said, does build a up that cash value. But there's also a couple different kinds that you can buy plain simple whole life is what I said typically covers you for your entire life. But sometimes people think I'm not gonna live to probably one 20. That's not in my family. You know, we don't have longevity or I don't have longevity. I don't think I'm gonna make it probably through my eighties. Cuz you know, generally most men don't live statistically past 75. So maybe it doesn't make sense for you to plan to one 20 because you just really realistically don't think you're gonna make it that long. Fine. Right. So really then in that case, you're probably gonna look more at maybe a universal policy cuz a universal policy is a permanent policy, but it has a lot of flexibility built into it because you can change the death benefit age. You can also change the premium so you can pay a little bit more. You can pay less, you can even up premium and it can pull from the cash value that's inside of it. So there's just different aspects of it that become very attractive to a lot of people for a lot of reasons. And ultimately you want to make sure that you get the right amount of insurance, but it has to be affordable to you cuz if it's not affordable, obviously you're not gonna keep it in place and you're not even gonna take it because you can. It cuz you just want to make sure that it's budget friendly to you and a universal policy is a great way of making sure that you can have permanent insurance for as long as you need it at a budget at a level that's budget friendly to you. Another part, uh, or different type of universal would be a variable life policy. Now variable kind of when you hear that really variable usually means it's tied to the stock market. So the underlying investments are market driven, meaning they go up and down as the market goes up and down that again can be helpful to you because sometimes a lot of people are like, you know this premium's high. I don't want to continue paying for it. I want to pay the least amount as possible. If I'm gonna take this I out at all and then a variable policy can maybe be more attractive because again, based on the market performance, you may end up paying less and that's just again, better for you because you pay less overall. You get the coverage you need for the length of time you need, but you wanna make sure again, you're paying the least amount of possible. Now that being said, let life insurance is all underwritten. So when you take out a life insurance policy, you can take it out all on your own. You can go to usually a life insurance company's website and you can apply right then and there and you can do all that on your own. Cuz usually when you sign up for the life insurance policy, then what happens is then that be Ginsey underwriting process, where once you sign the dotted line, then they will send a medical team to you where they check your height, weight, your blood pressure, and they draw three vials of blood and they do all this panel on you to make sure that, you know, you're you don't have any underlying health conditions that are problematic to the insurance company. Because again, they are very risk adverse. They don't want to make sure that they're paying out to the wrong people for the wrong reasons when they should never insured them from the get go. So the underwriting can be usually very strict or it can be, you know, kind of loose. It just depends on the insurance company and they want to make sure again, you're taking out the insurance for the right reasons on the right people and all that goes into account when you're going through the underwriting. But nevertheless you'll have the underwriting process. And that just dictates again, that you're gonna get the right rate because again, your life insurance agent will quote you at their ultra premium rates because they want to make it attractive to you. They want you to really buy it because again, that's how they eat, right? They usually earn a commission. Unless again, you bought it straight out on your own, but working with a financial professional can be a good way to make sure you get the right amount for the right reasons. And that again, it's set up the right way as well. And you know, sometimes people think, well, you know what? I'm gonna take out a life insurance policy on this total stranger. Cause it'd be good way for me to earn a little bit of money because this person's gonna die anyway. Well that's not gonna happen because life insurance, when you think about it, they've been around since the 18 hundreds, they know all the, and they are not about to ensure or let you take out an insurance policy on some complete stranger, especially if he's not long for this world, it's not gonna happen. You have to have what they call an insurable interest. A good reason to take out a policy on this person, right for your spouse. Good reason children, good reason them on you. Good reason. A total stranger, not a very good reason. So they look for the insurable interest as well. And that as well means that when the policy eventually pays out too, the insurance company is gonna make sure that it's being paid out for the right reasons, meaning that you weren't murdered. And that there is not some malicious reason behind your death because they are not gonna pay out if you've been murdered. And especially if your spouse has murdered you, they're not gonna pay him or her to murder you. That's just not gonna happen. You see that in on those crime shows where you know, people did in front of the money, but they will pay out when it's legitimate. Now, if you are murdered by some crazy man in, you know, you were in the mall, you know, God forbid something like that happens. Yes, they will pay out. But again, there's some nefarious reason why someone knocked you off and they are intending to collect on your life insurance policy, not gonna happen. And again, life insurance doesn't get paid off just like that. It doesn't, they generally, the insurance company is gonna at about 30 days while they do their investigation and make sure that again, they're paying out for the right reasons. They're not gonna let that check, just go out and go directly to your bank without again, doing their due diligence. Also when sometimes people think about taking out life insurance policy, they think about, well, you know, I wanna leave some money to my family and whatnot, all good reasons. But then their real reason behind is because they intend to knock themselves off. That's not a very good reason because life insurance companies usually have a two year suicide clause. So if you are having those kind of thoughts and that's your kind of strategy, well know that the life insurance company will not pay out during those first two years. And that's really written in the contract and you will see that like written in bold letters. They will not pay out during the first two years, if it's based on suicide. Now, if you have those thoughts, go to my website, pink money, online.com, go to the resources. There's great resources there that you can look up like suicide prevention, the Trevor project. And those are excellent places to reach out to if you're having those kind of thoughts. So then let's just talk a little bit about, about the beneficiaries. Again, we, I kind of touched on'em about life insurance hap pays out directly to your beneficiaries tax free. So there is no taxes on what they receive and that's just the law. That's how life insurance policies pay. So you want to make sure that you designate the right persons or entities to receive these proceeds. So oftentimes I see that parents will name their minor children as beneficiaries. They will never get a check from the life insurance company as a minor. It's not gonna happen. Cuz minors cannot enter into any kind of legal contract cuz they're minors. So what happens is that money will end up going into a trust or go to a guardian. And you really want to think through how this is all happening when you're not around and a good estate planning attorney can walk you through the whole strategies of thinking if I'm not around and I want this money to go to my kids, how do I want it to go to my kids? What kind of restrictions do I want to put on it? And what happens if the per who's raising my children is not good with managing their money. So oftentimes a good strategy is to name a bank or a trustee or an attorney. Somebody who's more competent about handling large sums of money so that the kids don't just spend it all on a charger or something. So you wanna make sure that all these strategies are thought of ahead of time and the person that you name it. You wanna make sure that they're around and if they're not around, you have another beneficiary. So you will always have usually a primary beneficiary and you'll have a secondary beneficiary. And if for some unknown reason you don't elect a beneficiary, I don't know really of any insurance companies. That'll let you get away with not listing a beneficiary, but let's just say you didn't then usually it will go into your estate. So that's a good thing in the sense that your state will have the liquidity that it needs. However, it complicates things because anything that is left in your estate will go through probate and in the probate court, it just takes time. And it, it, the judge will oversee everything and make sure that the right people get the money for the right reasons and that all your debts are paid off and everybody, you know, gets paid what they're supposed to and all that rigor, morale. It just takes time and it can be a little costly and you really want to avoid that to the largest degree. So when you designate a beneficiary, then that money will get paid directly to them without going through probate. And that's just a helpful way of, again, making sure the money is not tied up when it's really needed. That's you thinking ahead and making sure you've dotted all your and cross your Ts. So we have our term insurance, temporary insurance for a certain number of years, no cash value to it. Pure, simple, straight up life. Insurance is what you're getting pay off. Usually a large amount of debt or provide for a large need, like your spouses, providing them with X number of dollars for number of years. Whereas a whole life policy, our permanent policy is gonna cover you for the entire life that long as you're on the planet, it's gonna, like I said, maybe do age one 20. Usually these two policies will run in tandem. A lot of people will get a million dollars. Let's say of term insurance and maybe a$50,000 whole life policy to make sure it lasts their entire life. Those are excellent strategies again, depending on what your need is. And you know, making sure that this is set up the way that you need it and with the beneficiaries. So one thing that you really want to consider then too, is if you are a business owner, then life insurance can be an excellent tool to you use. When you're looking at your strategies for business succession, meaning let's say that you and your partner go into business together. Let's say, Tom, okay, so you and Tom go into business together and your co-owners and your 50 50. Now when you start the business, of course, what you're really thinking about is getting it up and on its legs and that it continues to be successful and all the good things that happen when you run a business. You're really not usually thinking about what happens if this business ends, because I'm no longer on the planet. Now, hopefully you've thought about all this in advance and you and your partner have done kind of planning in advance. But hopefully the idea here is then at the time of you or your partner's death, your partner really doesn't want to go into business with your family, right? Cuz your family doesn't usually have the same interest in the business and they don't have usually the same level of expertise or knowledge and your partner doesn't really want to go into business with your family. So what happens is you and your partner will generally take out a life insurance policy on each other so that at the time of, you know your death, then your partner will pay your family essentially to buy you out of the business so that they can own a a hundred percent. And that's great, cuz that just provides them with the ability to pick up where things are and move forward. And yeah, they, they miss you, but they're gonna continue on and the business will continue on and your family will be taken care of. Let's say that you decided to buy a business from somebody and you're paying on this business as an installment. Now the people you buy it from are expecting to receive this series of payments over time. They're kind of budgeting for it. If you're not around, then those payments stop right? Life insurance can underlie that agreement to make sure that if you're not around, then they receive that lump sum. And then again, the money they were expecting to receive over time is now paid to them. All is settled, all is good. So life insurance can be an excellent tool when you're in business. And you want to make sure that your business doesn't suffer because that and is not around many times, key employees will be insured just for that reason as well that if the company relies on them and they're not around then the company has the ability to take this lump sum of money, continue to run the business until they find a replacement. So many times key employees are insured and we're talking about the higher level of employees, right? Because their level of expertise is really needed. Many, many times it will come into a compensation package or again, it'll be a necessity that the business is required to, again, with proper planning, they need it to keep the business running. Now that being set, you cannot force anybody per se to take out a life insurance policy on themselves. Many, many, many, many times. I've seen people who do not want life insurance. They don't believe in it. They don't want it for whatever reasons that's their business, right? You can't force'em. I don't think that's a good idea, but that's their business. So again, you either self-insure cuz you got a lot of money, don't really need it, right. Or you do without it. And then people are just gonna have to do without the money that they might need to continue to live. That life that they've grown accustomed to, or they have a lot of savings to drawn instead. But however, sometimes let's say that it's a divorce situ where the husband is paying child support and he's also maybe paying alimony. Now in that case, the judge may require that there is a life insurance policy taken out and the husband has to take out a life insurance policy because he's the main breadwinner. And it could be the situation there. It has to be continuity. Or what I'm saying is there has to be money there to provide for the family. So it's not always there and it's not always dictated, but sometimes it could be. So if you have a good divorce attorney, then hopefully they are thinking ahead in this respect and that you then become the owner of this life, insurance, Paul, you pay the premiums, just your X is the person who's insured. They don't really have any other associations with the policy, just being the insured as well as they have to go through the underwriting, like I said, but other than that, they don't have any other ownership to it. And that can just be a very, very helpful thing. So many times that's a good idea to negotiate for when you're going through a divorce situation or again, thinking ahead. So life insurance, like I said, has many different reasons and purposes and it's a good estate planning tool, not only for in jewels, but for businesses as well. And this is a shout out to Nicole because hopefully you find this helpful and it answers some of your questions. Now this is not meant to be the be all end all, cuz there's, you know, a lot more to it. But I think you get the general idea because again, life insurance is a very useful and purposeful financial tool to use when you need a large amount of money to pay out at a particular point in time, really when you're not around. So again, to provide for others or to provide business succession planning, that is pretty much it for me regarding life insurance. I'm gonna actually bring on estate planning, attorney, answer some questions and kind of talk us through some situations cuz I think that would be very, very helpful and insightful to a lot of people. I know that there's a lot of things that you want to again consider when you're thinking about life insurance, but bottom line is the sooner you get it, the cheaper it's gonna be because you're and in good health, the older you are, the worse your health is the more expensive it's gonna be. Or you may not be able to get it at all. And that's a bad thing because again, when you need it, you really need it because there's a reason for it. You don't wanna wait till you're on your death bed and you need it and then you can't get it obviously, cuz no one's gonna ensure you. You want to ahead of time and make sure that it's affordable for you, right? And make sure that it's something that you can afford to pay the premiums on, on a regular ongoing basis. It cannot be, the premiums are so high. You let it lapse because life insurance policies are valuable because there's cash that's to them. Oftentimes too, as you a age, there are companies that will even buy your life insurance policy from you. If let's say you've chosen to let it go because you're, you're thinking, well, I'm just gonna go ahead and let this lapse because I don't need it anymore. I don't need a million dollars anymore. My kids are out of the house and they're on their own. They're doing well. The house is paid off that um, college is not an issue for me any longer. My debt's very, very low. That's true. But you know what? That policy can be assigned to somebody else or an entity like a life settlement company. And then they can continue to hold that policy and pay you cash for that policy. So why not? Right? You get the cash that you want, but they also have the ability to own that policy because it's an asset. It's worth something, especially on a permanent policy because it has the death benefit. It's gonna pay out X number of dollars based on the face value. But then it also has the cash that is inside of it. Again, something that's very, very helpful and is valuable. So in the grand scheme of things, you don't want to generally let your life insurance policy lapse. If there is a situation, a financial situation that you find yourself in, where it's becoming difficult to the premium, you really want to get a hold of the life insurance company or find somebody else who can pay that premium for you cuz you don't want the policy to lapse really because it can be again very difficult if you let that lapse and then you want to re-up that policy and number one, you're gonna be a holder. So automatically, you know, you're gonna pay more cuz you're older and then your health might be compromised. And then again, either it's gonna be more expensive or you won't get insured at all. So anytime you're offered life insurance, in my opinion, if you're offered it through your job, take it. Sometimes that's your job. They allow you to get two times three times, four times, whatever you take it. Because again, group policies are an excellent way to get a large amount of insurance without going typically through the whole underwriting rigor roll. Now, as you take out 2, 3, 4 times your salary, they might ask you a few questions and they might ask you to go through where they check your height, weight, blood pressure, draw some blood. I don't know. Just depends on that, but still again, if they're gonna be willing to ensure you, you want to take it out. And then when should you leave that job? Usually you can take that policy with you in a general sense. Now you're gonna probably pay more because you're not gonna get group rates because you're not in a group you're just yourself. So you have an individual rate and that's fine. It's gonna be more expensive. But the point is that you have the life insurance that you need, right? And that's, what's really valuable to you. You're gonna pay more, but you have the policy and that's really what you want. So anytime you leave your job, if you do have insurance that you've gotten through your company, find out who the carrier is, the life I company, contact them, tell'em I'm leaving. And what are my options of converting this policy into an individual policy for myself. And they will guide you through that. It's really important. Like I said, that you don't let your policy lapse from nonpayment, find somebody to pay that premium for you. And then you can pay'em back. Don't let at any life insurance policy lapse it's way too valuable, way too necessary in life. So there's other estate planning issues that come up when you're thinking about life insurance like wills and powers of attorney and all that good stuff, we're gonna go through more of that. So we can dig into the weeds a little bit and look at how all these pieces really work together. But it's the main piece to make sure that you're providing for your family. I think that's really the takeaway from here is that you're thinking ahead and you're planning ahead and you're making sure that you have the type of asset that's available to your family or survivor when they need it and you want them to have it. That's just my opinion. So hopefully you found that helpful. We'll go into a little bit more detail about some of these other parts. I think again, explaining a little bit more, give you some examples. I think those were always helpful. That's it for me again, big shout out 10 Cole, hope he had found this helpful and that it was useful for you. Drop me in comment at Jerry pink money, online.com or go to Facebook, Instagram, all that good stuff and, or, uh, pink money online.com and listen to the podcast. So you guys have a great day and I will look forward to speaking with you next to

Speaker 3: 33:51

And never sleep in. I, I want no disguises surprises, someone who I underst I don't need a guy who been over one night then tell me God, no more time. I'm to my

Speaker 4: 34:25

All.