might be the most important insurance you’ll ever own. You can always buy another car or another home, but you cannot replace your life or certain health conditions. Life insurance creates protection through a financial safety net in the case of a premature death or a qualifying illness. Today, it has evolved into more than just a “death benefit” for your loved ones when you pass away. You can use your policy while you’re still alive, for qualifying illnesses, long term care, or cognitive impairment. Of course, you’ll have to qualify for these benefits, and not all insurance companies offer them, but if you are eligible, you can own a comprehensive policy that provides coverage for a variety of needs.
Who needs life insurance anyway?
No one really needs life insurance! Yep, you heard that right. No one really needs life insurance. They need money. Life insurance creates income tax-free money in case of a premature passing or qualifying illness. Life insurance buys leverage. Just think about the amount of coverage you can receive vs the amount of premium you’ll have to pay. (Not to mention all the tax benefits).
Self-Insuring Vs. Life Insurance
Scenario 1: Let’s say you have $1,000,000 in a 401(k). First off, do you have $1,000,000 in your 401(k)? How long will it take you to get there? Is it guaranteed? Even if you had $1,000,000 today and then passed away, you would need to take that $1,000,000 and pay the government, which, depending on where you live, and your tax bracket, could only pay a NET of roughly $500,000.
Scenario 2: You have $1,000,000 in Life Insurance. Once you qualify, you get guaranteed coverage on day one and a 100% income tax-free payout to your loved ones. (Depending on your age and health, a $1,000,000 policy may only be a $1 per day).
In scenario 1 with the 401(k), you are paying the government a whole bunch of money up front. But why do that if you don’t have to? Wouldn’t you much rather provide your family with the flexibility to grow those same assets and have the freedom to withdraw them as needed? This is why life insurance is used by some of the wealthiest individuals in the world; it creates leverage that other financial vehicles do not.
Ask yourself: If your house were paid off, would you still buy homeowner’s insurance?
It isn’t a requirement in most states. Homeowner’s insurance is there to protect the lender — not you or your family.
Let’s consider the same with auto insurance: If your car were paid off, would you only have the state minimum liability coverage? You see, when you have a loan, “Full Coverage” is to protect the lender — not you or your family.
How much life insurance coverage should you have?
There is no official rule or government mandate on this issue. The choice is entirely up to you. This is why working with an experienced specialist is imperative. There are some industry guidelines that we use, you can never be “over insured”…but you can be underinsured. Let’s
look at an example: If your home is worth $350,000, could you have it insured for $1Million? Even if you were willing to pay the premium, the insurance company would say, “NO WAY!”
You might be asking, “Well, why not? I’m willing to pay the premium!” Well, because insurance is a transfer of risk and not an investment. Insurance will cover the value of an asset, but not for the purpose of profit.
So, how much are YOU worth?
Generally, life insurance companies are willing to provide 20-25 times your income. You might be eligible for more coverage, depending on the value of your estate. Age, health, assets, liabilities, and other factors may play a role in determining the maximum amount of coverage for which you’re eligible. Typically speaking you should have a Minimum of 10 years’ income replacement and full debt repayment.
Here’s an example of minimum recommended coverage:
John, 38, makes $100,000 per year, has two kids ages 8 and 10, a wife that stays at home, a mortgage balance of $300,000, $40,000 in car loans, $10,000 in credit cards, and $50,000 in student loans.
John should have at least $1.4 Million in coverage.
This will pay off debts and replace his income for 10 years. This does not cover any type of college funding for his children, retirement planning for his spouse, or lifestyle continuation beyond 10 years. His family would simply have to “figure it out” after 10 years.
Most insurance companies would allow for up to 25x his income, or $2.5 Million. That might sound like a lot, but just do the math on how expensive life can be. More importantly, how expensive it will become. College tuition, groceries, and everything else typically increases every year.
This is the first step when it comes to determining how much coverage you should have. The next step is to determine how healthy you are, what you are eligible for, which type of life insurance would be best, and what makes sense for your budget.
Additional Thoughts to Consider
The world we live in today consists of financial obligations and commitments. How will your family pay for the following if you cannot?
- Credit Card(s)
- School Loan(s)
- Credit Line(s)
- Any other type of Personal and Business Debt(s)
How will your family replace the following?
- Income needed to maintain same lifestyle
- College funding for children
- Daycare for children
- Retirement plan for surviving spouse
- Chronic illness
- Critical illness
- Terminal illness
- Long Term Care
These are just some of the main examples we use to determine how much life insurance a family needs. You do not want to pass on a financial burden to your family. The lenders, creditors, healthcare providers, and other service providers will still want their money no matter what.
Without life insurance and Living Benefits how do you plan on giving your family the financial resources they need?
Living Benefits of Life Insurance:
In recent years life insurance has changed dramatically for the better. In certain circumstances, you can access your death benefit while you are alive! You heard that right. In the event of a qualifying illness, a portion of your benefit amount can be advanced to you, so that you can use it while you are still living.
We call this policy feature a “Living Benefit.” Often, there is no additional cost associated with these living benefits; they are built right into the policy. You can use the money to offset medical bills, replace lost income from missed work, or any other needs you and your family might have.
With Living Benefits, life insurance protects not only your family, but it protects you as well. It’s a win-win.
Let’s take a look at the (3) most common types of Living Benefits and the events that might trigger them:
This is commonly defined as a chronic illness that is not recoverable and the individual is unable to to perform 2 out of the 6 “activities of daily living” or has a cognitive impairment such as Alzheimer’s or dementia. The 6 “activities of daily living” (or ADL’s) are defined as follows:
- Bathing: the ability to clean oneself and perform grooming activities like shaving and brushing teeth.
- Eating: the ability to feed oneself.
- Transferring: being able to either walk or move oneself from a bed to a wheelchair and back again.
- Toileting: the ability to get on and off the toilet.
- Continence: the ability to control one’s bladder and bowel functions.
If you are unable to perform at least 2 of these 6 activities, you could qualify to use your life insurance Living Benefit. Most companies will accelerate up to 24% per year, meaning a
$1,000,000 policy could yield your family up to $240,000 a year in the event of a chronic illness. Talk about peace of mind! (The net amount that you receive may differ based on the companies policy and contract terms, but the bottom line is that you will have access to benefits while you’re alive!)
What if you’re not chronically ill, but have an acute illness? Here is a list of some major acute illnesses:
- Invasive metastatic cancer
- Major Burns
- Major Heart Attack
- Aplastic Anemia
- End-Stage Renal Failure
- Benign Brain Tumor
- Major Organ Transplant
- Aortic Aneurysm
- ALS (Amyotrophic Lateral Sclerosis)
- Heart Valve Replacement
- Blindness due to Diabetes
- Coronary Artery Bypass Graft Surgery
- Critical Illness Paralysis of two or more Limbs
If one of these situations occurs you may be entitled to access your death benefit. Some companies will accelerate your death benefit up to 90 or even 100%! (The net amount that you receive may differ based on the companies policy and contract terms, but the bottom line is that you will have access to benefits while you’re alive!)
Terminal Illness is commonly defined as having less than 24 months to live. In this case, you may be able to receive up to 90 or even 100% of your death benefit. (Like the Critical Illness
and Chronic Illness, Living Benefit, the net amount you receive may differ based on company policy and contract terms. However, this is a good guideline).
Each company and policy has their own qualifying definitions and payout factors for Living Benefits. These are discussed in great detail when determining the type of coverage that is best for you and your family. There are 3 main triggers for Living Benefits, and each will allow you to advance money from your policy amount while you’re still living.
Life Insurance During Retirement
It’s easy to see the value of life insurance in your earlier years, when you have a young family, you’re buying your first home, and upgrading your vehicle inventory to haul around the kids. But what about after that? Do you really need life insurance?
The answer is yes. This isn’t just our professional opinion. It is backed by decades of experience, scientific research, and mathematics. You might not need as much coverage later in life, when your kids are off on their own, and your house is paid off, but there’s still a need for coverage.
Social Security: When one spouse passes away, the surviving spouse will only receive the higher of the two Social Security benefits. This means there will be a drop in income, which might mean a lifestyle change. The death benefit of Social Security is a one-time payment of
$255. How far does $255 go today?
Pension: Perhaps you have a pension as a part of your retirement income plan. Some pensions do not offer a spousal continuation of benefits, or the beneficiary benefit was not elected since it typically pays less. If a beneficiary payment was elected, it is typically a fraction of the total original benefit. How do you make up the difference? Easy. Life insurance.
Debts: Most people will still have debt during retirement. What about medical bills, credit cards, mortgages, car loans, etc. How are these going to be paid off? We think you know the answer by now.
Retirement Assets: If there are debts to be paid, shortage of income and funeral costs force the surviving spouse to pull out money from his or her retirement accounts. This can create unfavorable tax events and the potential for the survivor to outlive his or her retirement income. Well, then what was the point of saving, if you’re just going to outlive it?! Imagine if there is another recession, and you needed to access these funds in a down market of 30% or 40%.
How long will that money actually last? Life insurance solves this problem.
Funeral Expenses: The average funeral cost today for a very basic funeral is about $12,000. In 20 years it could be as much as $30,000 with inflation. Even a small policy just to cover funeral costs is always better than nothing at all.
Terminal Illness, Critical Illness, Chronic Illness, Long Term Care: We’ve touched on these points above with respect to Living Benefits. Well, when are you most likely to need these benefits? That’s right! In retirement.
Some of these potential expenses are covered by Medicare, but Long Term Care in its full extent is not covered. The average cost of long term care today is $6,500 per month, and it’s projected to double in the next 15 years. How long will your money last if both you and your spouse need care and it costs $13,000 per month? The Living Benefits of a Life Insurance policy would certainly ease these costs, if not eradicate them.
Legacy: Perhaps you would like to leave an income tax-free, lump sum of money to your kids, grandkids, or a charitable organization. With life insurance you can guarantee your legacy. (It can also be used to help mitigate estate tax).
Having a well-designed life insurance and long term care strategy can help eliminate these risks. Life insurance provides peace of mind. Period.
It gets even better…
You can now potentially avoid a medical examination to obtain life insurance! Depending on your age, you may qualify for up to $3,000,000 in coverage by simply completing an online application and a telephone consultation. Some companies do not even require a phone interview, you just simply fill out an application to verify eligibility.
Types of life insurance coverage:
The most basic and common type of life insurance. Most Term life policies offer a level premium and guaranteed coverage for the specified Term of the policy. For instance; most term life coverage periods are 10, 15, 20 and 30 Years. Some companies do offer other variations and coverage periods up to 40 + years.
Pros: Term is cheap, provides the needed coverage for a family without crunching the budget. It can also provide living benefits and the ability to convert the policy into something that is guaranteed for life without a medical exam. Some term life policies offer a Return Of Premium feature. Allowing you to receive a portion or even all of your premiums back that you have paid into the policy. The cost will be hiring for these types of policies.
Cons: Term ends, and in most cases the insurance company keeps all the money. If you buy a 30 year term at 40 years old and die a day after the policy ends at age 70 your family receives nothing.
Even if you were alive at age 70 and wanted to buy more term insurance would you qualify? And if so how much would that cost? a lot!
Is a part of the “permanent” life insurance classification which offers cash value. Universal Life comprises three different types of policy structures. Universal Life contracts offer flexible premium options, guaranteed death benefits, living benefits and cash value loan options.
- Universal Life (UL): offers a fixed interest rate and generally has little no cash value. In return it can offer a much lower premium and provide lifelong coverage with living benefits.
- Index Universal Life (IUL): offers a fixed interest rate option along with a variety of selected Index options to earn higher potential interest rates. The Index accounts are tied to an index such as the S&P 500. When the index increases in value you are able to participate in a portion of the gain which is limited to a Cap rate or Participation rate. For instance: Your Cap rate may be 9.5%, if the S&P 500 grows by 10% you receive 9.5%, if the S&P 500 earns 7% you receive 7%, if the S&P 500 declines by -10% you receive 0. You can never lose money due to market declines in this type of policy.
- Variable Universal Life (VUL): offers 100% of market performance but is also subject to 100% of the market declines based on the invested selected. VUL’s have lots of risk due to market volatility and people who own them must understand that they could lose their coverage and monies placed into the policy if a declining market occurs.
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Is the oldest type of “permanent” life insurance and it too offers cash value, guaranteed death benefits, living benefits and cash value loan options. The main difference with whole life is that interest is credited based on Dividends. These dividends are based on many factors but mainly they are based on the companies profitability, and Directors of the companies decision to declare a dividend payout rate. Historically, dividends have been declining over the past few decades. This can be linked to the fact that interest rates are low and an insurance company’s profitability is linked to their individual investment performance which is consistent with a majority share in bonds. As bond yields have reduced over the years so have aspects of profitability.
Other factors included, how many new policies were purchased and how many claims were paid out. Generally, Whole Life offers a higher Guaranteed cash value but in turn most people will pay a higher premium for equal, level, coverage vs a Universal Life policy. The loan options (accessing cash value) can also be less favorable to the policy holder. Living benefits are limited and oftentimes require an additional premium to have.