Demystifying Life Insurance: Protecting Your Loved Ones and Your Future
In today's episode, we dive into the world of life insurance. Life insurance is often misunderstood and, let's face it, not the most exciting topic. However, it's a crucial part of financial planning, and we're here to break it down for you. We'll explore the purpose of insurance, the different types of life insurance, and how to make informed decisions to protect yourself, your loved ones, and your investments.
Here are some key topics we'll cover:
- The primary purpose of life insurance: Why do you need it?
- The different types of life insurance policies and how they work.
- The pros and cons of term insurance versus permanent life insurance.
- Why life insurance isn't just about death, but also protecting your income and assets.
- Common misconceptions and pitfalls to avoid when purchasing life insurance.
- The importance of understanding surrender charges and policy fees.
- Alternative strategies for financial protection and growth, like Roth IRAs.
Life insurance may not be the most exciting topic, but it's an essential part of securing your financial future. Join us as we demystify this often misunderstood aspect of financial planning and help you make informed decisions about your life insurance needs.
If you have any questions about the topics discussed or want to schedule an introductory call, feel free to reach out via phone or email.
https://ascendinvestment.com/
(801) 476 - 1200
Transcript:
00;00;06;29 - 00;00;20;20
Speaker 1
Hello and welcome to your investment partners with Paul and Garrett, where we talk about all things financial, focusing on helping you plan, keep and grow for a successful future. If you're new to the podcast, welcome. And if you're tuning in again, welcome back and thank you for listening.
00;00;21;03 - 00;00;38;10
Speaker 2
Hello and welcome to your investment partners with Paul and Garrett. Today we are talking about life insurance. We cover what's the purpose of insurance? What are the different types of life insurance? And how to think through protecting yourself, your loved ones and your investments. If you have any questions about the items discussed today, please reach out either by phone or email.
00;00;38;19 - 00;00;43;17
Speaker 2
My name is Garrett Smith and we look forward to having you with us today. All right. Here we go again.
00;00;44;10 - 00;00;51;11
Speaker 3
Ready for this one? This is. This one actually could be slightly controversial, I guess.
00;00;51;17 - 00;01;08;24
Speaker 2
There's definitely differing of opinions on on this one. Today, we're talking about insurance, particularly life and life insurance. Yeah. And we're I guess life insurance is often sold. Not bought.
00;01;10;13 - 00;01;12;13
Speaker 3
Mostly sold. Yeah.
00;01;13;17 - 00;01;21;11
Speaker 2
And nobody wants to call it death insurance anymore. Right. That was the greatest rebrand in the history of marketing, is to shift it from death insurance to life insurance.
00;01;21;12 - 00;01;28;00
Speaker 3
Yeah, for sure. It's going to make me live. Hmm. Give me some of that.
00;01;28;07 - 00;01;30;02
Speaker 2
And we're not totally opposed to insurance. You don't.
00;01;30;06 - 00;01;31;16
Speaker 3
Have it. No, you got to have it.
00;01;31;17 - 00;01;34;26
Speaker 2
So right off the bat, let's. There's. There's places for insurance.
00;01;34;29 - 00;01;58;29
Speaker 3
Yeah. Yeah, It's just gotten. You know, it's a very complicated. Can be a very complicated and and confusing product. And for, you know, really probably over 95% of the people, it should just be a no brainer. Just super simple, easy is what I need done, right.
00;01;59;00 - 00;02;13;19
Speaker 2
You know, I do think one thing that is hard that the insurance and financial business is kind of complicated is it's kind of the gateway for somebody who wants to get into finances is to sell or work in the insurance field for sure.
00;02;13;20 - 00;02;14;03
Speaker 3
That's where I.
00;02;14;03 - 00;02;24;26
Speaker 2
Started. Yeah. And so, like, when you get that, it's kind of the doorway into other places that you want to go. Sometimes products are sold that aren't necessarily the best over the long term.
00;02;24;27 - 00;02;25;09
Speaker 3
Right.
00;02;25;13 - 00;02;35;01
Speaker 2
And so I think there is a little bit of a conflict just right out of the gate with new new agents or even, you know, long term agents just, you know, trying to make it in the business stuff.
00;02;35;22 - 00;02;55;01
Speaker 3
Yeah. And just not not having the the life experience or, you know, a broad base of product knowledge to know if what they're selling really is a fantastic product. You know it on the surface it can look pretty good that really you know you start you know, peeling some layers back and you go, I don't know about that.
00;02;55;01 - 00;03;00;27
Speaker 3
So anyway, let's just talk about the types of. Well, first, let's start with what's the what should most people buy?
00;03;01;02 - 00;03;17;03
Speaker 2
Well, I think we should even back up for there. Like, what's the purpose of insurance? Right. Homeowners insurance. It's it's obvious, right? The house burns down. You need a place to live. Right. And you got to get it rebuilt. And so you're you're buying in the event of a loss. Right. It's not to double the value of your home.
00;03;17;12 - 00;03;21;04
Speaker 2
Right. If something were to happen to the home, it's insured against that.
00;03;22;02 - 00;03;28;24
Speaker 3
And health insurance works the same way. You know, you've got you really ought to have it, if at all possible.
00;03;29;04 - 00;03;32;17
Speaker 2
Disability insurance, the same way, same with on the job you can earn in.
00;03;32;21 - 00;03;49;00
Speaker 3
Auto insurance, auto and you got to have it. You don't want to be buying a new car because somebody ran into you and didn't have insurance or you ran into somebody. And, you know, I mean, it's just the insurance is kind of a it's a it's a necessity in American life.
00;03;49;08 - 00;04;05;00
Speaker 2
It's especially if you're looking to build and preserve some. Well, sure, because it's always those unexpected expenses that can really set you behind. Right. We've all seen you had to rebuild all house on your own. Yeah. Most people's financial lives can't handle. Yeah. Rebuilding a second house.
00;04;05;18 - 00;04;39;26
Speaker 3
And so there's really only two reasons to buy. To buy life insurance. And for 99% of the people, it's because somebody is reliant on, you know, your income, basically. So in the most pure form is, you know, you've got some kids, you've got a wife, you got a mortgage, got some debts, and you're the, you know, kind of the primary breadwinner, you know, there's there's risk there because if if you get in a car wreck and die, then, you know, those obligations don't stop.
00;04;39;27 - 00;04;49;25
Speaker 3
In the pure sense, that's what life insurance is for. As to is to provide liquidity and income protection for, you know, people who are left behind.
00;04;49;26 - 00;05;01;19
Speaker 2
Yeah. And I think the same thing is covered for for those maybe if one one person's choosing to stay home for returns can cover that as well, because there's obviously uncompensated work that's happening. And if something were to happen.
00;05;01;19 - 00;05;03;04
Speaker 3
Child care expenses.
00;05;03;18 - 00;05;04;21
Speaker 2
Are still going to be their funeral.
00;05;04;21 - 00;05;07;13
Speaker 3
Expenses. And, you know, that's just Yeah, so.
00;05;07;13 - 00;05;09;28
Speaker 2
So if there's dependants should be insurance.
00;05;09;29 - 00;05;49;08
Speaker 3
Yes, absolutely. And and the best way to insure that is just with everybody's heard the term it's it's term insurance it's it's just pure death benefit. You know it's cheap. You hear advertisements on the radio all the time. You know the term insurance. It used to be like a you know, a real negative. It was before about you know, I would say probably around 1980, you know, 95% of the insurance that was sold was some form of savings, cash balance insurance product.
00;05;49;08 - 00;06;19;01
Speaker 3
And and in the eighties, the thinking started to change. There was a company that came out that by by term and invest the difference and they struggled for a while but eventually that all caught on. And I think you know at this point probably, you know, well over 50% of the insurance that sold is probably term insurance. And and that's because it's you know, that's that's really the the purest form of life insurance is just plain term insurance.
00;06;19;01 - 00;06;38;28
Speaker 2
Yeah. So term is usually the cheapest. There's a set premium that you get assigned when you when you sign up for the product, they usually cover ten, 20, 30 years. Or else if something were to happen to you, then there's a death benefit that goes to the fisheries. And it's it's generally usually by far the cheapest insurance option out there.
00;06;39;09 - 00;07;07;26
Speaker 3
And the the negative on term insurance has always been well, but when you get when you get old, it gets really expensive, which is true. I mean, Garrett can buy term insurance significantly cheaper than I can because there's, you know, 25 year age difference. The difference is he needs a lot more insurance than I do, you know, because he's he's got three kids at home and a mortgage and I don't have any kids at home.
00;07;07;26 - 00;07;19;29
Speaker 3
And I've got a pile of money that I've saved over my life. And and so if something were to happen to me, you know, the family lifestyle doesn't doesn't change at all. So I actually don't have any insurance.
00;07;19;29 - 00;07;38;06
Speaker 2
Right. Because you're self-insured and self-insured. You know, eventually the goal is to flip that switch of, Sure, I was relying on the insurance company to cover while I'm accumulating. And then when you get to the distribution phase, you know, you've in essence become self-insured, I'm sure over my basis. And there's less dependents on your usually later right.
00;07;38;06 - 00;08;02;20
Speaker 3
So that so that brings up the other reasons sometimes life insurance the other legitimate reason lifetime life insurance is sold as sometimes you get in a situation where the estate gets so large that there's some estate taxes that are going to, you know, be assessed on the estate. Right now, each person can pass on it somewhere around $13 million.
00;08;02;21 - 00;08;39;00
Speaker 3
It moves every year. But if you're estates over $13 million, you have to pay the estate taxes. It's basically a death tax. Yeah, that's a better way to put it. So a couple can pass on, you know, right now, $26 million. So if you're stays over $26 million right now and you don't want the kids to to carve death taxes out of that, to Uncle Sam, then you could argue that there's a there's a reason for some life insurance there to to provide liquidity, to pay the estate taxes instead of diluting the estate to the kids.
00;08;39;00 - 00;08;45;17
Speaker 3
So that's a you know, that's a whole nother subject. But that probably affects less than 1% of the population right now. Yeah, and.
00;08;45;17 - 00;09;07;04
Speaker 2
That's but that's the part that draws all the headlines. Yes. Big, wealthy billionaire families doing this. Maybe you should to write this super successful football coach that makes tens of millions of dollars a year. Right. Doing it. Maybe you should do well. It's running into those estate limits. And so it's for a different purpose right then than an investment vehicle, if you will, right?
00;09;07;27 - 00;09;32;09
Speaker 2
Yeah. So it's it's always any time you're buying insurance, you've got to be asking the question, what am I insuring? And that's always what you got to keep in mind is an income with dependents. Is it estate limits that you're trying to work through? And if there's no legitimate reason or if there's no traditional reason, then you've got to kind of back up and double check your your diligence on the product.
00;09;32;09 - 00;09;32;20
Speaker 3
Right.
00;09;33;03 - 00;09;52;09
Speaker 2
So that's the first one. You spend a lot of time. There's term life insurance. 99% of the people. It's the first place you're likely going to stay in that area. It's what we've both done personally because it's it's cheap and it gives you coverage for the years that you need it. Right. And then you save and invest for to be self-insure down the road.
00;09;52;19 - 00;10;00;26
Speaker 2
And then you can do it generally at a lower cost, typically higher returns just because there's not as many fees associated with, you know, basically by term and invest the difference.
00;10;00;26 - 00;10;01;09
Speaker 3
Right.
00;10;01;21 - 00;10;21;17
Speaker 2
You know, investment options have become extremely efficient these days. And you can get, you know, very, very low cost options there. The next phase up is universal policies, universal, you know, indexed, universal variable, universal life insurance. These are usually the the really long names that you see that get advertised.
00;10;21;17 - 00;11;05;26
Speaker 3
Yeah. Yeah. And most of these products are sold as is kind of an, you know, not so much as as insurance per se, but but it's how you get insurance, but it's really a great investment vehicle. And you know, they're just not that just be either be blunt about it they're yeah they're they you know but they are sold pretty aggressively and it's a shame because, you know, they they're the insurance industry does have some kind of unique tax benefits that they've been able to lobby for.
00;11;05;26 - 00;11;37;25
Speaker 3
And preserve over the years. But if you look at just the returns, the problem is, is you have the cost of the insurance inside there and it all gets kind of jumbled together. It's really hard to sort things out. You run an illustration, you know, over 40 years and you can make anything look good and you know, so and and the salespeople are highly incentivized to sell universal life.
00;11;38;10 - 00;11;45;26
Speaker 3
A guy Jarrett's age, you know, you can buy $1,000,000 worth of term insurance and that and I'll probably, well, 500 bucks a year or something like that. It's been.
00;11;45;26 - 00;11;46;08
Speaker 2
A while so.
00;11;46;15 - 00;11;47;01
Speaker 3
You know.
00;11;47;08 - 00;11;48;02
Speaker 2
A little bit more than that.
00;11;48;07 - 00;12;09;13
Speaker 3
But but the same policy, what the universal life policy is, is probably going to be, you know, five or $6,000 a year, if not more. Yeah. And and the idea is that, you know, that extra money goes in and it's invested and you get a return on it and and that you can you know you can borrow against it.
00;12;09;13 - 00;12;34;01
Speaker 3
I always wondered about borrowing against your own money. You know you have a life insurance policy. You got, you know, let's say you get $100,000 in there and you want to buy a vehicle and so you say, well, I'm gonna go borrow from a policy. And so you pay you know, you pay your policy 6% interest or 4% interest to borrow your own money.
00;12;34;01 - 00;12;37;27
Speaker 3
You know, it's just it's it's just odd to me that.
00;12;38;27 - 00;12;55;26
Speaker 2
But but I think it's you need to highlight what's the purpose of that investment portion in there. It's to help offset future insurance costs. Yeah. Like the main the reason why they were designed is to have that cash value grow. Not so you could borrow against it and save you some taxes potentially.
00;12;55;27 - 00;12;56;10
Speaker 3
Right.
00;12;56;10 - 00;12;59;11
Speaker 2
But to offset so you don't have an increase so you don't.
00;12;59;11 - 00;13;22;03
Speaker 3
Have to have a premium cost when you're 80, when you're 80. Well, my argument is you shouldn't need insurance. If you need insurance when you're 80 or 90, if somebody's still relying on your income, you've really kind of messed up. So the whole the whole goal here should be, you know, I only want to buy life insurance for, you know, 30 years at the most.
00;13;22;05 - 00;13;35;09
Speaker 2
Yeah. And, you know, they always you know, they get pitched in no risk tax free borrow against it phrase I often hear is be your own bank that comes around a bit five or seven years ago. Yeah sales pitch comes back through.
00;13;35;10 - 00;13;36;10
Speaker 3
Yes it does.
00;13;36;10 - 00;14;08;10
Speaker 2
And it's the pitch is is great and it because every time it comes around I go well maybe I've missed something. So again yeah. So you go down the road and you look again and you're up. It's the same thing. They've got caps limits, they've got charges in there and those are all. So when you have an investment in there, whether it's fixed or variable, you know, tied to an index or just a set rate of return, those are all at the will of the insurance company to adjust how much they charge and what their caps are.
00;14;08;23 - 00;14;30;23
Speaker 2
And and so know that is the flaws in the caps you always have to keep an eye on because it's not you that can choose how much of that return you can participate in. Like if the stock market goes up 10%. What your cap on that return, it's it's up to the insurance company and they get a change that depending on how well the policy is doing.
00;14;30;27 - 00;14;31;12
Speaker 3
Right.
00;14;31;12 - 00;14;52;11
Speaker 2
And so we've seen those get throttled all the way down to 1% when you think you're getting full market participation. Right. And it's that and it's up to the will of the insurance company. And so you always have to be careful who is in charge of the policy to make the changes as times go on. Because you for universal policies, you can make some changes.
00;14;52;11 - 00;15;02;08
Speaker 2
You can increase, decrease your premiums, you can increase or decrease the benefits. There's some flexibility there and, you know, change, but there's also some things the insurance company can do.
00;15;02;27 - 00;15;09;18
Speaker 3
Exactly. And trust me, they they will do what what what they need to do to protect themselves.
00;15;09;18 - 00;15;11;03
Speaker 2
And of course, their business. Sure.
00;15;11;15 - 00;15;30;11
Speaker 3
Yeah. It doesn't do anybody good if the insurance company goes broke. Right. So they have self preservation is their main objective for sure that, you know, I think one of the one of the other clues that people can really take a good look at on whether to buy a policy or not is is what kind of surrender charges.
00;15;30;29 - 00;16;02;29
Speaker 3
And you know, a lot of a lot of insurance products that are sold. So again, we're talking about mostly universal life, whole life products. You know, you can put money in them for a two, three, four or five years. And if you decide you want to cash them in, there's nothing to cash in. You know, the the surrender penalties are so heavy that, you know, you get into them and you you can't get out of them.
00;16;02;29 - 00;16;31;22
Speaker 3
And that that should be a huge red flag if if and that has a direct correlation to the amount that the insurance agent is is receiving as a commission. And, you know, I've been in commission sales before and I have anybody I against anybody, you know, making a living, you know, selling selling product. But the the life insurance industry, it's it's a lucrative sales process because it is a difficult job.
00;16;32;07 - 00;16;58;00
Speaker 3
And but, you know, our our objective is to, you know, protect clients and put out accurate information. And if you if you look at that illustration and you're putting, you know, two, three, $5,000 a year in a policy and you're surrender your your surrender value is 000 $300, you know, $700 each.
00;16;58;00 - 00;16;58;11
Speaker 2
Year goes.
00;16;58;11 - 00;17;24;19
Speaker 3
By as each year goes by. You know that that tells you that that was a very, very lucrative policy for the for the agent to sell. So if you if you do want to go down that road, you like the idea of of having a cash value policy, you can buy, you know, universal life type products that are what they call no load universal life products and they're available.
00;17;24;19 - 00;17;29;06
Speaker 3
You can go out and and we can help you with that. Identify one if you want.
00;17;29;17 - 00;17;31;28
Speaker 2
But they're usually not sold by an individual.
00;17;31;28 - 00;17;43;04
Speaker 3
They're not going to be sold by an individual because there's no there's no money in it. Yeah, right. So you can get the same product without, you know, without the, you know, the downside of of the heavy surrender penalties and things.
00;17;43;04 - 00;17;59;06
Speaker 2
And I also think one thing to highlight here, too, is there's other ways of accomplishing all of these different pieces. Exactly. I've tried to package about five different things in one. Yeah, well, if you break them apart, you can still have an investment vehicle. If it's in a traditional brokerage, you can put those assets up as collateral and borrow against them.
00;17;59;06 - 00;18;11;06
Speaker 2
So you can still get the borrowing idea. Yeah, you can still get the investment idea. You can, you know, opens up the full world of what investment you have. And then if you put term in there with it, it's it's kind of the combination of the two.
00;18;12;01 - 00;18;22;06
Speaker 3
Well and the you know, nobody should even remotely consider cash value life insurance unless they're fully maxing out a Roth IRA.
00;18;22;17 - 00;18;23;03
Speaker 2
Know for sure.
00;18;23;03 - 00;18;32;13
Speaker 3
Because a Roth IRA has all the all the advantages that they claim that universal life products have with none of the downside.
00;18;33;05 - 00;18;34;04
Speaker 2
Especially the charges.
00;18;34;06 - 00;18;49;22
Speaker 3
Especially the the charges, you don't have to borrow your own money. It grows tax free. You pull it out tax free. All the all the good stuff that they say about these universal life products. A Roth IRA has all of those, all the positives and none of the negatives.
00;18;49;25 - 00;19;09;12
Speaker 2
It is a great option to go down that road. If so, you know, and then the last area is whole life insurance. And that's kind of the bit you're the advantage there is your premiums get set. It is the same your whole life and it guarantees coverage your whole life. Yeah. You don't have to tweak and adjust because that's one of the risks of universal life.
00;19;09;12 - 00;19;26;15
Speaker 2
You kind of got to steer the ship to make sure you can keep that coverage your full life or or you can run into some significant tax consequences or just lose out on all the funds you thought you had in there. Yeah, and whole life insurance, the insurance companies taking the full risk and they just say for this coverage, this is the premium and we will guarantee coverage your whole life.
00;19;26;17 - 00;19;45;04
Speaker 2
Yeah. And so that's the idea of of whole life insurance and usually end up with a significant cash balance balance in there as well. But that's going to offset future charges in the policy as well. That's what that cash balance is particularly designed for, is to cover future expenses of a life full life coverage policy.
00;19;45;04 - 00;19;45;15
Speaker 3
Right.
00;19;46;15 - 00;20;12;14
Speaker 2
Is so insurances are a great thing. It's just making sure they get covered to the right area and you're getting the protection that you're wanting and not necessarily paying for some things that you don't necessarily need. Yeah, we're fans of insurance in the right instances for the right reasons, but buying one that's maybe unnecessary can lead to, you know, a lifetime of expenses of of you know, sometimes throwing good money after bad.
00;20;12;26 - 00;20;28;04
Speaker 3
Yeah. And ask yourself the question is does my homeowner's insurance have a have a savings account with it? No. Does my car insurance have a savings account with it? No. So there's a clue? Yeah.
00;20;28;28 - 00;20;43;25
Speaker 2
Yep. And so if you have one and you've come and you think it's a it's a great idea, we we review these often for people, you're more than welcome to send them our way. We'll talk you through what they look like. We're not going to make the decision for you. We'll just point out this is how it works in this instance.
00;20;44;14 - 00;20;58;13
Speaker 2
There's usually a hypothetical or a, you know, a kind of a guide. If this is the best case scenario for it and will point out maybe some areas where it may not live up to to what it is, or maybe it will because it's a good one, I want it. Sure. You know. Yeah, if you got it.
00;20;58;23 - 00;21;09;23
Speaker 3
I'm open. If I find one that's just killer, I want in. You know, if if this thing was was if I find one that's near as good as the current salespeople say it is, I want one.
00;21;09;23 - 00;21;10;26
Speaker 2
Yes.
00;21;10;26 - 00;21;35;14
Speaker 3
It's just the all the good things are emphasized and all the negatives are are pretty well suppressed through that sales process for the most part. So be careful. And if you want to I mean, like like Gary said, we'll review them if you need to and we don't sell insurance. So, you know, we're pretty pretty open about just looking at them and giving you just a third party opinion, uninterested opinion about what you have there.
00;21;35;21 - 00;21;37;25
Speaker 2
Yep. All right. Until next.
00;21;37;25 - 00;21;38;29
Speaker 3
Time. Thanks again.
00;21;39;04 - 00;21;58;00
Speaker 1
You thank you for tuning in and listening to your investment partners with Paul and Garrett. If you like what you heard, be sure to subscribe to our podcast on iTunes, Spotify or wherever you get your podcasts. Also, visit us as an investment dot com where you can subscribe to our newsletter to keep you up to date. See you in the next episode.
00;21;58;10 - 00;22;35;07
Speaker 1
Kessler Norman and ride LLC, DBA Ascend Investment Partners is a registered investment advisor. Advisory services are only offered to clients or prospective clients where our firm and its representatives are properly licensed or exempt from licensure. No advice may be rendered by ASCEND Investment partners unless the client service agreement is in place. The opinions expressed in this podcast are for general informational purposes only and are not intended to provide specific advice, performance data, or recommendations that any particular security portfolio of securities, transaction or investment strategy is suitable for any specific person.
00;22;35;17 - 00;23;06;13
Speaker 1
This program is only intended to provide education about the financial industry. All opinions contained in this podcast are subject to change at any time without notice to determine which, if any, investments may be appropriate for you, please consult with your financial advisor prior to investing. Any past performance discussed during this podcast is not guaranteed of future results. As always, please remember that all investing involves risk and possible loss.
The commentary on this website reflects the personal opinions, viewpoints and analyses of the Ascend Investment Partners employees providing such comments, and should not be regarded as a description of advisory services provided by Kesler, Norman & Wride, LLC dba Ascend Investment Partners or performance returns of any Ascend Investment Partners Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Ascend Investment Partners manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.
Ascend Investment Partners provides links for your convenience to websites produced by other providers or industry related material. Accessing websites through links directs you away from our website. Ascend Investment Partners is not responsible for errors or omissions in the material on third party websites, and does not necessarily approve of or endorse the information provided. Users who gain access to third party websites may be subject to the copyright and other restrictions on use imposed by those providers and assume responsibility and risk from use of those websites.
To Get Started Click Here
(https://ascendinvestment.com/start)
Sign Up for Email to stay in touch
(https://ascendinvestment.com/signup)