032: How to Best Utilize Life Insurance
Oct 1, 2020
Taxes are the single biggest expense that people have in retirement. Everyone wants to have a plan in place to deal with them, but few know how to do it well.
When you retire, paying taxes on Social Security and even on ordinary income can be voluntary, but only if you have the right plan in place. With the national debt rapidly rising and no predictable budget set by Congress for several years in a row, personal planning has gotten more important than ever.
Today, in the first part of a two-part series, we take a look at the state of taxes for retirees right now, why retirees are proving conventional wisdom about taxes wrong all the time, and what the future may hold.
Here are just a handful of the things that we'll discuss:
- What makes term life such a popular option for young families.
- Why whole life insurance was so popular 15-20 years ago – and why it may (or may not) be a good fit for you and your family.
- What differentiates whole life from permanent life insurance – and why you need a clear strategy to utilize either.
- What makes indexed universal life insurance so popular with businesses.
- How to customize life insurance products to meet your unique needs.
- “One of the biggest misconceptions with life insurance is that everything has to be off the shelf. You can actually customize them a little bit to fit your needs.” – Ed Siddell
LeAnne Siddell: It's The Retirement Trainer with Ed Siddell, a podcast about finding ways to help you become financially fit for your future no matter what financial shape you're in now. Life insurance, why do we need it? Who needs it? And what kind should we get? This is LeAnne Siddell and here to help us with all of our questions and give us some guidance to help us stay in the best financial shape possible, the retirement trainer, Ed Siddell. Hi, Ed.
Ed Siddell: Hey, LeAnne. How you doing?
LeAnne Siddell: All right. Big day today. It's a Monday.
Ed Siddell: It's a Monday. Had a great weekend doing some fishing up in Lake Erie, little walleye fishing. I got a couple of fish stories.
LeAnne Siddell: I've heard them. I've heard them but share.
Ed Siddell: No, just went up with a buddy and some of his friends and it started off perch fishing and no go. And so, then we went, did a little bit of walleye and had some good luck and it was a lot of fun. In today's topic, life insurance kind of relating it to this weekend, I mean, that's what it's all about, being able to make sure that when you leave this earth that your family can still do what they want to do and not leave them in financial peril. They're not going to be okay because you're no longer here but making sure that you take that financial risk away is really important. I mean, that's kind of key.
LeAnne Siddell: And that's the shocking thing is every time you do take these trips in the back of your mind, you're always thinking, did I take care of everything in case the worst happens?
Ed Siddell: Yeah. Because life happens, right? And when bad things happen as they sometimes do, you want to make sure that - people, right, they have that question. If something happens to me, just like you said, is my family going to be taken care of? And that's really in the most simplest form. That's the whole purpose of life insurance because you want to make sure that your family is financially taken care of. And like I said before, they're never going to be okay because you're no longer here but you want to make sure that you at least take that financial risk right off the table and that's really what insurance is. So, insurance of any kind, now today we're talking about life insurance but insurance of any kind is really the transfer of risk. So, what does that mean? So, you as a person, an individual, you become insured because you're being insured by a company. And in exchange for you paying that premium, they're now taking that risk. If something were to happen to you, then they've got to pay up. And so, like earlier today, we're talking about helping one of the families out and they're coming in to sign their temporary insuring agreement. So, that means as soon as they sign that agreement and that application and they cut a check that they're temporarily covered. And that's really what it's all about, making sure that you get the right kind of insurance to cover the right needs.
LeAnne Siddell: And there are a plethora of options out there. And that's kind of why I brought to you that this is such a topic that needs to be kind of narrowed down because there are all kinds of options. There are…
Ed Siddell: Had a lot of situations lately.
LeAnne Siddell: Yeah.
Ed Siddell: New families that we're working with and, yeah, so this is kind of timely.
LeAnne Siddell: Exactly. And not just many different but many different carriers. There's a lot of stuff to wade through. So, it is all too confusing but let's try and break it down.
Ed Siddell: Alright. So, first of all, a lot of people buy something they don't need, the wrong type of insurance, because they're out buying a product. Okay. And going back to this whole thing, life insurance is just like any other tool in the tool bag, a financial tool bag and it's got to be part of your overall financial plan. So, that plan is the blueprint. It's kind of like the foundation. And think of it this way, a financial plan is the blueprint. When you build a house, you don't start with a roof. You start with the foundation and then the walls and then the roof but you have to know exactly what it is that you're building first, how many bedrooms, how many bathrooms. Is it a 1, 2, 3 car garage? Whatever it is. Does it have a back porch? All these things are really important. And that's what a financial plan is. You've got to figure out exactly what it is that you want and then work the numbers around it. And so, once you have the blueprint, then it'll actually come through, and based on what your wants and needs and goals are that the kind of insurance that you should get maybe, and maybe a couple of different types to cover the needs as well as how much.
LeAnne Siddell: Because that's the one thing that is so amazing about life insurances. It can cover multiple areas that you have a need for.
Ed Siddell: Yeah. It can. The hardest thing for people to understand is that there are different types, and they all serve different purposes. It's not that one is bad and one is good. You could have the best insurance policy in the world but if it's covering the wrong thing or doesn't fit your needs, then it doesn't matter how great it is because it's not good for you. And so, there's more but we're going to break it down into the four basic types of life insurance. So, you have term life, you have whole life, you have universal life, and you have indexed universal life. And there's a couple of others but these are the basic ones. I'm just going to go through and explain what each one is and what they do. Okay. So, let's talk about term life. And this is the cheapest and the most expensive. What I mean is this is when, all right, so what is term life? It's coverage for a very set, very specific amount of time. So, you can get it for 5 years, 10 years, 15 years, 20 years, 30 years. And as soon as that term expires, you no longer have the coverage. And that's why I say it's expensive. I don't know what the statistic is anymore but less than 1% or 2% I think it is that ever cash in on those policies. So, it's a big moneymaker but it serves a really, really good purpose for business reasons, for young families starting out because the premiums are very inexpensive for the amount of death benefit that you get. And so, it really is probably the most affordable when it comes to the premium payments.
LeAnne Siddell: It's like the box that you check when you have a child or you get pregnant, you check that box because it's that term.
Ed Siddell: Okay. We're covered. And so, then the next one we have is whole life. All right. And this was really popular with our parents in even 20 years ago, 15 years ago, but it is permanent life insurance. The premiums are set through the life of the policy so you continue to pay them and it has a cash value component that grows tax-deferred. That doesn't make it good or bad. It's just how that is structured. It continues to grow. Some people look at it as an investment. Again, it depends on your overall situation. I'm not going to say good or bad, one way or the other, but it may not be the best thing for you and what you're trying to achieve. And then you have universal life. So, universal life is kind of a cross between whole life and term. So, it is permanent life insurance, it has the death benefit, and it also has a tax-deferred cash value. So, it has the ability for growth as well, just like the whole life but it's usually a little bit less expensive because they blend in, some of that term to make it less expensive.
LeAnne Siddell: So, that's the term that I was going to have you explain as far as blended. I think a lot of people don't necessarily get that component as to how it makes it a better product maybe.
Ed Siddell: Well, it's not so much better. It's just different. So, it's just like anything else. It's got to make sense for what it is because there's good and bad. So, the more term insurance that you blend into those policies to keep the cost low. A lot of times it doesn't raise the cash value. So, you've got to figure out, is the purpose just for death benefit which is for income replacement? Is it for a business strategy? Keyman? Golden handcuffs? What's it for? So, that's really what it determines what that blend or if you should even blend it.
LeAnne Siddell: Got it.
Ed Siddell: And then you have the indexed universal life. So, it's a universal life policy. It's tax-deferred cash value and it can be allocated to a fixed account or to an equity-indexed account. So, it can mirror an indice whether it's the S&P or the Dow or something along those lines. And there are certain roles that go along with it. I'm not going to go down the rabbit hole with that's probably a topic for a whole another day but it allows for a little bit more growth than typically a traditional universal life policy. Again, when we're looking at indexed universal life policies, this is probably the most popular now because a lot of businesses use it for mergers and acquisitions and buyouts, keyman insurance, so if you have an employee that is just invaluable, and golden handcuffs, you've heard of the golden parachute. So, a lot of these life insurance policies they're really good financial plays in the business world too but they work really, really well for families. And again, probably the biggest misconception with life insurance is that everything has to be off the shelf. You can actually customize them a little bit to fit your needs. I always say it's kind of like, remember, Carvel? It was Carvel, right? 31 flavors. You know what it was? Was it Carvel? Baskin Robbins?
LeAnne Siddell: I was going to say Baskin Robbins.
Ed Siddell: Maybe it was Baskin Robbins. I don't know.
LeAnne Siddell: It shows you how much older you are than me.
Ed Siddell: Nice. That's awesome. I get blinded by ice cream.
LeAnne Siddell: Well, 31 flavors and I think you're basically saying you can have a vanilla with the Superman, whatever.
Ed Siddell: Yeah, the bubblegum flavor.
LeAnne Siddell: Exactly.
Ed Siddell: And peppermint and birthday cake all in one. And actually, that's probably the key to it. It really comes down to what is it? When we're helping families, one of the questions we ask is, do you have life insurance? What is the purpose of it? And a lot of times when I asked, "What was the purpose of you buying life insurance?” People just look, they're like, “I don't really know.” “Well, was it to replace income if something happened to you?” “Sure, yeah.” But see, that's why it's so important just to get a better understanding or help these families get a better understanding of why they're getting what they're getting and what they have.
LeAnne Siddell: So, the explanation going into the benefits and the riders, I guess the first question is because I've seen this a lot, what is a living benefit? Since we're talking about death benefit with life insurance, what's a living benefit?
Ed Siddell: Yeah. You know, not all things are created equal, right? So, the living benefit, well, it's exactly what it sounds like. It's a benefit that you're allowed to receive while you're still alive. It's only based on the insured, the named owner of the policy but a living benefit allows you to make use of the death benefit as whatever the benefit that lived, that rider living benefit is, it draws down on the death benefit. So, if it's a $500,000, $1 million policy, $250,000, whatever it is, if you start drawing down on those benefits, that death benefit gets reduced. So, probably the most popular one, and most times there's no charge for these in Ohio. In some states there are but in Ohio, there isn't. The first one is that the terminal illness rider and it’s exactly what it sounds like. If you are terminal and your doctor, unfortunately, says that you have 24 months or less on this good earth then you're allowed to start drawing on the death benefit for whatever the reason.
And depending on the policy because each policy, each company, it's a little bit different. Some allow you to take up to 50% the first year or 75%, 90% of whatever that death benefit is so that you can do things now while you're still alive but you need to make sure that as part of your overall plan to make sure that your family's taken care of.
LeAnne Siddell: Get your affairs in order.
Ed Siddell: Yeah, absolutely. So, one of the other living benefits, it's called critical care and it's a rider. It's a living benefit. On most policies, there's no additional fee or charge for that rider too because normally when you say rider, there's a fee attached to it. Okay. But like I said with these, the ones that we're talking about today, there aren't. That's if you were critically injured, car accident, heart attack, stroke, and you're in the hospital, it's really good. Again, I’m speaking in generalities here because every company, every policy is a little bit different but allows you to drill down on that death benefit. If your spouse or your family are taking care of you, they're missing time from work, those types of things.
LeAnne Siddell: Got it.
Ed Siddell: And the most popular now, and we use a lot with our planning with families, it's the chronic care rider. Some companies actually called a long-term care rider and even if they don't, it still acts that way. So, this is when you have an ongoing health issue. Think of it like this. When it comes to long-term care, in order to qualify for any kind of insurance no matter the age, you have to meet certain criteria, and that criteria is pretty simple. You can no longer perform two of the six activities of daily living and they're called ADLs, activities of daily living, and those six activities are eating, bathing, dressing, transferring, which is really walking, continence, which is getting on and off the commode, the toilet, and then toileting, which is actually using it. So, if you can no longer perform any two of those six, then you qualify for long-term-care insurance. Well, for most of these rider policies that have that chronic, it's the same thing which really, again, we like it because it's kind of more of like an asset-based policy than traditional long-term care.
I don't want to go down the long-term care rabbit hole. Again, that's a topic for another day too but when you're talking about your overall planning and we're doing one right now for family. We're doing a combination of using term insurance and indexed universal life that has the chronic care rider on it because we're trying to serve a couple of different purposes. We want to make sure that that income replacement is there for a very short period and then once they retire, everything's paid off. They're no longer going to need that much but they still want that permanent coverage just to make sure that his family's taken care of and also the long-term care. That's kind of the bonus. And that's key because it allows you, depending on the policy, you can take up to 25% of that death benefit per year to help cover those costs or you could do 20% per year. We look at it as an overall planning tool, not just to make sure that they're taking care of whoever needs the care but also the stay-at-home spouse, and those taking care of them because most people don't understand that the caretakers, they pass away two to three years before, on average. They're the ones that are taken care of because of the physical, mental, and emotional stress.
And then you have the financial, that burden and when we're talking about advanced planning, it allows you to start that planning process to make sure that the assets are there for the stay-at-home spouse and family, especially those with special needs. Again, it's part of a bigger picture. So, it's not just, “Hey, I got an insurance policy.” Well, what is it that you're trying to achieve? What do you want to do? How much does it cost? And then here's the other thing, too. How do you pay for it? Because it's got to fit your budget. We have some families that we're helping that just want to pay a lump sum and just pay it all upfront and be done. We have some that want to stretch it out while they're still working and then the day that they retire, they want the policy paid off. They don't want to have to deal with it anymore. And others just say, "You know what, based on the premiums and everything else, and the earnings that we're getting on our investments, and blah, blah, blah, blah, we'll go ahead, we'll roll the dice, and pay the lifetime premium payment.” So, that's why I say there are 31 flavors. And I'm going to go with – what did you say? Baskin Robbins?
LeAnne Siddell: The younger of the options.
Ed Siddell: You sure it's not Dairy Queen?
LeAnne Siddell: Well, there are a slew of questions that you should be asking when you're coming down but inevitably, what you started with is a plan that you started with. You've got to have that plan in place. You've got to know where your gaps are and what tools you can use to fill those gaps. And I guess the biggest…
Ed Siddell: You want me to use the tool analogy again? You don't use a hammer to cut a piece of wood. You don't use a saw to hammer a nail.
LeAnne Siddell: Well, that's three podcasts in a row I've had to listen to that. Okay. So, how can people find out what they need or what kind of insurance they need and how much it'll cost?
Ed Siddell: You know what, they can give us a call. Like I said, the retirement fitness plan, we do not charge to build the plans for the families that we're helping. It is specific custom to each family that we're working with and we don't charge. So, there's no cost, no obligation. Come in and we'll do whatever we can to help you out.
LeAnne Siddell: Well, as you just heard him say, get your questions answered. Find out a little bit more. There is no cost, no obligation, and you can reach Ed through his website at EGSIFinancial.com or you can send us an email at the firstname.lastname@example.org or give us a call at the office at 614-526-4118. Thanks, Ed.
Ed Siddell: Thanks, LeAnne.