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10 Things to Know About Life Insurance

10 Things to Know About Life Insurance

May 28, 2024

When I was a kid, one of the most negative things my parents could say about anybody was that they reminded them of a life insurance salesman. Today, I’m a licensed life insurance salesman, along with being a CERTIFIED FINANCIAL PLANNER™ professional, Behavioral Financial Advisor, and fiduciary financial planner.

I have found that it really helps me serve my clients better to have a life insurance license. It allows me to quickly and easily evaluate their life insurance situation. I find that most families have something that’s not quite right about their life insurance strategy: either too much coverage, too little, too expensive, or too complicated.

When I meet with families in West Saint Paul, Minnesota, to talk about their financial goals, we often end up “cleaning up” their life insurance. If you are curious and would like to talk about your situation, just follow this LINK to find a time for us to have a get-acquainted visit.

Since almost everybody needs life insurance, I thought it might be good to share a few things that everyone needs to know about life insurance.

  1. There are different kinds. Like most products in America, you can buy life insurance in more than one form.
    • Permanent insurance is bought with the expectation that you will pay the premium until the day you die and then receive a death benefit.
      • Whole Life policies have a fixed premium for the entire contract. The contract will accumulate a cash value if you choose to close out the policy before you die.
      • Universal Life policies allow you to adjust premiums up or down as long as you are covering the minimum insurance expenses each year.
      • Variable Life policies combine investment products with life insurance so your premium and death benefit can vary over the life of the policy.
    • Term (temporary) insurance is bought to provide a death benefit for a fixed period. Usually, you hope and plan to outlive this policy and never get a death benefit. The premiums are lower for this reason.
      • Term is a great fit for specific needs like:
        • Providing money to pay off a mortgage if one partner dies.
        • Paying for college tuition for a newborn if one partner dies.
        • Paying off temporary loan obligations like car loans or credit card debt.
  2. Life insurance can build savings. Permanent life insurance can accumulate cash value that you can access while alive. Part of the benefit of using insurance as a savings vehicle is that most families have a reason for the insurance, and so, they ALWAYS pay their premium. Many families don’t ALWAYS make deposits to savings.
  3. Tax laws are favorable. Any cash value in your life insurance is not subject to taxes on the growth. If you remove the money in the form of a policy loan, that money is not taxed. But, if you take a loan against your policy, the insurance company will charge you interest on the outstanding balance. And, any cash value removed from your policy will reduce the death benefit.
  4. Investment fees can be high. When you buy a complex life insurance product, with investment components, you will pay for life insurance features and for investment expenses. It’s not uncommon for life insurance products to have internal expenses as high as 3% per year. If the goal is investment accumulation, you should consider 401(k) or IRA accounts. They have similar tax-deferred features, but generally much less cost.
  5. You can combine life insurance and long-term health care coverage. One popular solution for many families is to use a hybrid life insurance product to provide long-term old age care. The policy has a death benefit in the event you die, and the death benefit can also be used to pay for old age care. Any money you use for long-term care will reduce your death benefit. If you need some death benefit anyway, this can be an efficient strategy to cover two needs (death benefit and old age care costs) at the same time.
  6. Insurance can help budget your retirement spending. If one partner has a pension that will end at their death, a life insurance policy to provide the survivor with money to replace the pension can be a great solution. And other families simply worry about spending savings too fast. A life insurance policy that benefits the surviving spouse can provide a backstop that allows some families to be more comfortable spending retirement savings now.
  7. It’s a more tax-efficient inheritance than other assets. Since life insurance proceeds are income-tax and capital gains-tax free, your heirs will get to keep more of what they inherit. With 401(k) or IRA inheritance, all the money is subject to income tax when it’s removed from the account. And current tax law REQUIRES most non-spouse heirs to remove all the money within 10 years of inheritance. Life insurance beneficiary designations also make for a speedy and cost-effective estate processing since they do NOT require probate.
  8. You need to qualify based on health, but it’s easier. Most of us are healthier today than 20 years ago, so life insurance underwriting has gotten easier to reflect that. Typically, you will still need to fill out a medical questionnaire and maybe provide some medical records. Based on your health, the insurance company will decide IF they wish to insure you and at what price they are willing to do it. Many people with conditions like heart problems and cancer can still get affordable life insurance if their medical conditions are handled the right way.

Life insurance is available with NO MEDICAL questions, but it’s usually much more expensive and often comes with limitations like the policy does not pay out if you pass away within 3 years.

  1. Not every insurer delivers the same quality. Cheaper insurance is not ALWAYS the best. It’s prudent to get prices from multiple carriers and to review the financial ratings of any companies you are considering. In the end, you are counting on the insurance company to be around and to have the financial resources to fulfill their obligations when the time comes.
  2. Many policies are sold with large commissions. In some cases, a life insurance agent works directly for a life insurance company. In this case, the agent has an obligation to serve the needs of their employer first. So, they might be motivated more by a large commission than by getting the client a great value. A fiduciary financial planner who is also a life insurance agent will typically work with many different companies, so they can look for the best value.

 

And, if the financial planner is an advocate for their clients ALL THE TIME – a fiduciary financial planner, they are obligated to provide recommendations based on the client’s best interest. This is the way I work. All the time.

If it sounds like choosing life insurance could be confusing, you are right. I think you would benefit from a visit with an experienced, highly-trained, CERTIFIED FINANCIAL PLANNER™ professional and Behavioral Financial Advisor in West Saint Paul, Minnesota to help better understand your options. I love to meet new people. So, follow this LINK to find a time for us to have a get-acquainted visit.

I am a financial planner who is an advocate for my clients ALL THE TIME – a fiduciary financial planner. I provide guidance based on clients’ best interests, not commissions or sales quotas. I think it’s the best way to serve clients and I am thrilled to work this way all the time.

And yes, I’m still taking on a few great families to be part of my financial planning practice in West Saint Paul, Minnesota and, thanks to Zoom, across the country.

Dunncreek Advisors does not provide legal or tax advice, nor is this article intended to do so.