Top Life Insurance Options: Choose Wisely for Your Future!

June 6, 2023

There are two basic types of life insurance, permanent and term. Term life insurance offers pure insurance coverage for a specific period of time, while permanent insurance covers you for your entire life.

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So, this leads to the next big question: What type of life insurance should I buy for my family? Yeah, and when we think about life insurance, there are really two predominant types, even though they are packaged in different ways. The two main types of insurance are term insurance and permanent insurance. They sound exactly like what their names suggest. Term life insurance offers pure insurance coverage for a specific period of time, whereas permanent life insurance is intended to be in place for the remainder of your life. One is temporary (term) and one is permanent. The intent behind permanent life insurance is that it will be there when you pass away, and the insurance policy will pay out.

Now, I’m going to play Devil’s Advocate because I know that if I were a person who sells life insurance, I would take advantage of this stat. I heard that 99% of term life insurance doesn’t pay out. Yeah, it expires. So, if 99% of term-based policies don’t actually get paid out, isn’t that just throwing money away, bro? Well, technically, yes, if you think about it in that sense, from an ROI perspective. I’m spending money on something that I hope I never use and hope I never have to capitalize on. But think about it logically. I spent money on this term for 10 years, 15 years, 20 years, and guess what? I didn’t die. That’s reason enough to celebrate. So, it’s actually a good thing. It’s okay to technically throw that money away because it did serve a purpose, even though I didn’t receive a benefit from that life insurance.

Well, in a lot of ways, this is somewhat similar to when you insure the items you own, like a house or a car. I don’t actually get frustrated that I didn’t have a car accident last year. I mean, I actually paid an insurance premium for that, but I’m glad that nobody in my family got in a car accident and actually needed to replace a vehicle or something like that. So, I think you’re right about that. But it is one of those things. I want to build this foundation a little bit more so people understand what they’re dealing with.

Term insurance is a period-certain type of insurance. Typically, you see terms like 10-year term, meaning the premiums are level for 10 years, 20-year term, 30-year term, etc. They do expire, so that probably means there’s a cost component. Because if one is permanent and one goes away, how are these things structured? From what I have to pay to get the same type of coverage, all else being equal, you’d probably say, “No, I want the permanent stuff, right? I want to make sure that’s there.” If all else were equal, but unfortunately, all else is not equal. When you look at the cost of these two types of insurance, they are vastly different.

Let’s look at a specific type of permanent life insurance called whole life insurance for this example. Look at what the annual rates of this insurance are for a healthy female in excellent health. If she wants to have a $500,000 death benefit at 30 years old, she can go out and buy a term policy at 30 years old for $188 to have half a million dollars of coverage in place. If instead, she wanted to buy that same amount of coverage through a permanent life insurance policy, a whole life policy, she’s going to spend over $4,000 a year for the exact same amount of coverage. Now, there’s a difference.

Typically, with a term policy, like on a 30-year-old, this would be for a 20-year level period. Now, look, if you have a child that was just born when this person was like 28 years old, and now, by the time this person gets to 50 years of age, that child will probably be graduating college, and hopefully, they’ll be financially independent. It will be completely fine that this insurance goes away. But I gotta tell you, this is the thing that, when I see the pricing, because when you look at 30-year-olds, 40-year-olds, it is like a 20-fold difference in what the annual premium is. And I just know, when I was in the messy middle, I had it seemed like everything in the world was trying to get to my back pocket, you know, whether the kids, me trying to save for retirement, you know, there’s just so many things going on. The fact that if I had to save four thousand dollars a year to pay my life insurance premium versus 188, I don’t think I could do it. So, I would just be sitting there naked on the exposure to my family, whereas at least term allows me to cover the need but then invest some of that money above and beyond that for the future so I can actually build financial independence above and beyond.

Yeah, but see, that’s where the salesman gets you, that’s where they kind of wrap this up as different things. Okay, okay, no, no, you don’t have to just let your life insurance be this thing that you’re throwing money away on, it can actually be a wealth generation tool for you. We’re gonna pitch it as a way where not only can you buy the life insurance coverage, but we’re gonna have those dollars grow, we’re gonna have those dollars be invested, we’re gonna have those dollars pay a dividend. But we think our opinion is your strategy that you just said makes a lot more sense. We want our investment, our insurance products to be insurance, and our investment products to be investments. Because what we find is when we mix those together and we have them serve a dual purpose, neither of those purposes are optimized, and we think that it’s not the best solution. There are a few different reasons why.

No, no, wait a minute, I want to stop you because look, we don’t sell life insurance, so I think if I was an insurance professional, I’d be like, “Well, these guys, they’re going to just try to push you towards something that they deal with versus what we do.” But don’t take our word for it, you know, Daniel in the notes, and you can do your own research on this. Consumer Reports had an entire write-up on whole life insurance: is it right for you? And you can do your own Google due diligence on this. But from their findings, they found that this more conservative type of investment or thing that you’re buying to provide coverage, that we’ve already shown is 20 times the cost of term, is only typically providing a rate of return between one and a half to three and a half percent per year on average. And that’s on average after all the fees and all the expenses, because what you often get pitched on, there’s this guarantee, there’s this dividend rate, there’s this rate of return that you’re going to receive on this, if you’re talking specifically about whole life.

On this whole life policy, however, one of the things that’s really, really interesting is the guaranteed rate of return. You would think that as we’ve moved into this environment where interest rates have gone up and cash, a couple of years ago, was paying nothing, but now we’re seeing cash paying rates as high as four, four and a half percent. You would think that the dividend rates on those whole life insurance policies would have been the same. They haven’t; they’ve actually stayed flat or actually decreased slightly. So these dividends, this guaranteed return, doesn’t necessarily move with interest rates. So if we do enter into a time period where we have really high inflation like we said over these past couple of years, these policies often have a growth rate that’s embedded in them, even if you were getting the full dividend rate, not factoring in the fees and expenses, it wouldn’t even keep up with higher levels of inflation.

But maybe, just maybe, we’re looking at this wrong. Maybe the guaranteed type of product is not right. That’s your whole life. What if we transition to maybe a variable life insurance policy? Because there are even products, because these insurance companies are no fools, they’ve actually structured products that allow you to have some component to participate in what’s going on in the stock market. What’s the issue with that? Well, a lot of times what they’ll do is say, “Okay, great, you know, you can invest these dollars. And then what we’re going to do, though, is we’re going to put some caps on them, or we’re going to make you subscribe to a capture ratio.” So maybe, if you invest and you’re going to be in the market, you want to peg it to some specific market benchmark. Rather than you getting all of that uptick, you only get a portion of it. So maybe you’re going to be rate-capped. If the market makes 15-20% in a given year, you might actually only be capped at a 7% rate of return. What do you think the insurance companies are doing with these dollars? They’re taking these dollars and investing them the same way as you could on your own. Except, they’re keeping the amounts above and beyond those rate caps. So they are actually handcuffing what these policies can return over the long term.

Well, what I don’t love about life insurance as an investment is also you’re going to figure out a whole cadre of words like surrender period, you know, a deferral period where you’re not actually allowed to pull out more than 10% of the cash value of policies. Just be careful because there are a lot of restrictions. Because remember, to offer guarantees or even offer participation in the markets, there has to be a catch. That’s right, because they have to control your behavior. And a lot of times, the catch on guaranteed products is going to be your inability to pull the money out. So they have enough time to spread out the risk. On the variable products, they’re going to catch you on the fine print. Like they’re going to take away the dividends from the S&P 500. They might show the performance, but they don’t get to count the dividends and other participating factors. Or they’ll cap the performance. So if you have years like you shared where the market makes 20% and you’re capped at 7-9% rate of return, that is tremendous. It’s a disadvantage in the long term. So just don’t fall prey to this. And this is a challenge that I have. There is no doubt that there are very wealthy families that do use insurance as a tool.

Sure, however, I am still waiting when we do our annual wealth study of all of our millionaire clients. I don’t have any of my millionaires who have said that the reason they’re millionaires is because of this great insurance product that got them there. It is typically a tool that the ultra-wealthy use to expand or protect their wealth. It’s not the tool that got them to where they are. That’s just my experience. I’m sure there are going to be insurance agents and others that will say it, and I love insurance. If you looked at how I’ve structured my financial life, I am insured up to my eyeballs. However, it is one of those things where I have not used insurance to try to be the wealth builder because I just don’t think that is the most efficient path with all the fees, all the restrictions. There is a much better way. But that doesn’t mean you should ignore the value that life insurance can provide for your family.

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