As the old saying goes, there are two things in life that are guaranteed: death and taxes. With that being said, it goes without question that we all need some form of life insurance. Life insurance can protect your family in the event of your death. In my opinion, it’s pretty selfish to not have life insurance. You would be putting your family in danger by not having it and funeral costs are extremely high! But Jeff, I can’t afford it, I have too many bills. No excuses. You certainly can afford every new pair of Jordans that come out. Why in the world would you want to put your family at risk?
What is Life Insurance?
Life insurance is an agreement between you (the insured) and an insurer. You ultimately get to choose your beneficiaries which simply means that if you were to pass away, these people would receive the death benefit (I’ll explain later). Life insurance can help replace the loss of income that would occur in the event of death and can be used to pay any debts that you leave behind such as mortgages, car loans, credit card debts, etc. The proceeds from the policy are nontaxable to the beneficiary which is a huge benefit! It can ultimately create wealth for your beneficiaries and put them in primetime position for success. Some well-known billionaires actually inherited something from their family. Do you really think they got to where they are today with no help whatsoever? “Self-made” is cool, but not too many wealthy people in this world are truly “self-made.” They received some type of support to get to where they are today.
Now let me ask you a question: When you die, what do you want to be known for? Well guess what, if you leave nothing behind, then you’ll be known for nothing. Your legacy would virtually disappear and you may be seen as a burden due to you leaving a substantial amount of debts behind. Now back to the basics.
Life Insurance Needs and Considerations
So you just gave a rant about why I need to be covered, now how much do I need exactly? Life insurance needs depend on whether you're married, the size of your family, the nature of your financial obligations, your career stage, and your goals. Keep in mind that life insurance needs typically increase as you get older and you need to continuously re-evaluate your coverage over time. As you become the millionaire (or billionaire) that you’re set out to be, please ensure that you adjust your coverage to the appropriate amount. Some people cover just enough for their debts to be paid off. Some cover their annual income for a specified period of time. There’s truly no one size fits all model when it comes to life insurance. In addition, the type of policy you choose, the amount of coverage, your age, and your health all play a part in the actual cost of your coverage.
Different Types of Policies
Life insurance can be broken down into two major types: term life insurance and permanent (cash value) life insurance. Term policies provide life insurance protection for a specific period of time. If you die during the coverage period, your beneficiaries receive the death benefit. If you live until the end of the term, the policy terminates or you can renew it. Oh yeah, the death benefit is a specified amount that your beneficiaries will receive in the event of your death (if you die within the coverage period). It’s always stated in the life insurance policy so be sure to ALWAYS read your policy! The term is typically 1-30 years and can be renewed until age 95 in some cases. Premium payments typically increase as you get older and there’s no ownership in the policy (i.e. you’re renting the policy) unlike permanent life insurance.
Permanent life insurance policies provide protection for your entire life as long as you pay your premiums. Unlike term, you actually get to own the policy and part of your premiums are invested in order to accumulate and withdraw money tax-free (known as cash value)! This is a true game changer. Premiums for permanent policies are higher than term policies due to the fact that part of the premiums are invested. The account builds cash value (or cash surrender value) over time and the cash value can be withdrawn with or without penalty at any time. You can borrow against the policy and essentially pay yourself back over time. Lastly, the premium payments may stop at a certain age, although you may want to keep investing more money until you die. Some people use permanent life insurance policies as a way to have access to tax-free wealth in retirement by essentially borrowing money from themselves (the cash value). Some people even fund their children’s education tax-free through life insurance!
There are various forms of permanent life insurance policies. The first and most popular form is whole life insurance. Whole life insurance provides level (equal) premium payments for life. The death benefit and minimum cash value are predetermined and guaranteed. Any guarantees associated with payment of death benefits, income options, or rates of return are based on the claims-paying ability and financial strength of the insurer. It’s a pretty safe investment option and some policies even pay dividends. It typically grows at a slower rate than other permanent policies due to the guaranteed features.
The next type of permanent policy is the universal life insurance policy. You may pay premiums at any time, in any amount as long as policy expenses and the cost of insurance coverage are met. The amount of insurance coverage can be changed, and the cash value will grow at a stated interest rate, which may vary over time. It’s a bit more flexible and typically grows at a faster rate than whole life. It’s essentially a combination of term and whole life and provides some pretty unique features such as a ceiling/cap (maximum interest rate) and a floor (minimum interest rate). This means that you have both limited upside and downside potential.
Next we have variable life insurance. Variable life insurance also provides level premium payments for life (just like whole life). However, the death benefit and cash value fluctuate depending on the performance of investments in what are known as subaccounts. Now it’s really time to test the market! A subaccount is a pool of investor funds professionally managed to pursue a stated investment objective. In more plain English, a subaccount is an index fund such as a mutual fund, nothing fancy. The policyowner (you) selects the subaccounts in which the cash value should be invested (just like a 401(k) or IRA).
Last, but certainly not least, is variable universal life insurance. Variable universal life is a combination of universal and variable life. In other words, it’s life insurance on steroids! You may pay premiums at any time, in any amount as long as policy expenses and the cost of insurance coverage are met (just like a universal life insurance policy). The amount of insurance coverage can be changed, and the cash value goes up or down based on the performance of investments in the subaccounts (just like a variable life insurance policy). It is arguably the most flexible life insurance policy type in the world!
Where Can I Buy This Stuff
You can buy life insurance through an employer, an association, a licensed life insurance agent or broker, or directly from an insurance company. Always remember that any policy that you buy is only as good as the company that issues it, so investigate the company offering you the insurance. One way is to evaluate the financial strength of the company (i.e. how long they’ve been paying dividends).
Life insurance is a must-have. Not only can it protect your family, but it can also build you tax-free wealth. Always remember that if you leave this world with nothing, you’ll be known for nothing. Take that with a grain of salt.
If you have any questions, please don’t hesitate to reach out to me.