Have you ever wondered if your life insurance policy secures your family's future or if it’s just another bill to pay? 

Join me, Deb Meyer, on this critical episode of the Beyond Budgets® podcast as we unravel the complexities of life insurance. We'll explore the emotional and financial dimensions of choosing the right life insurance, using relatable comparisons like renting versus owning a home to explain term and permanent policies.

In this episode, we dig into the specifics of term life insurance, emphasizing cost-effective premiums, as well as universal and whole life insurance. Gain valuable insights on determining the right amount of coverage based on factors like career stage, number and ages of children, and household expenses.

Tune into this episode to equip yourself with the knowledge to make informed decisions about your family's financial security.

Episode Highlights

(00:26 - 01:20) Navigating Life Insurance for Loved Ones

(03:02 - 04:29) Understanding Different Types of Life Insurance

(08:09 - 09:31) Permanent Insurance Considerations for Families

(19:05 - 20:31) Life Insurance Policy Analysis and Changes

(22:41 - 24:40) Hybrid Long-Term Care Policies Explained

Resources

Find a Fee-Only Financial Advisor on NAPFA

Top Term Life Insurance Companies

Connect with Deb Meyer

Website: WorthyNest.com/podcast 

Schedule a Free Consult

Full transcript

Deb Meyer (00:01.934)

When you think about life insurance, what typically comes to mind? Is it something you're excited to look into? No. If you're being honest, no. But unfortunately, many of us have come across a close friend or family member, someone in our circle of acquaintances or people that we are close to who unexpectedly pass away. And unfortunately, none of us really know when our time on earth is done.

This episode's going to be focused on a kind of hard topic, life insurance. But I do hope it encourages you and gives you some education around things to consider when you are getting a life insurance policy or if you already have one, evaluating whether that's the most suitable solution for your family. There's both the emotional aspect, obviously, when someone passes away, and that's going to be hard no matter what, but the financial aspect is something within your control and it's something that really does have a little bit of nuance to it that I want to share.

So just to give you a little background context on me and my practice, I am not an insurance agent. I'm a fee-only financial advisor and fiduciary. Fee-only basically means that my ONLY source of compensation is from fees that clients knowingly pay to me.

When they sign an engagement letter to work together, my minimum annual fee right now to work together on an ongoing basis is $300 a month. So they knowingly say, okay, I'm going to be paying this fee to your advisory firm every month or quarter , whatever the cadence is. For a lot of other advisors, they might be fee-based where they can be set up where they're getting stated fixed fees or an asset-based management fee. But for many of the other advisors, they also have capability to write insurance policies and engage in some of these other financial transactions where they could earn a commission. So as a fee-only advisor, I'm always trying to be as transparent and have the fewest conflicts of interest. And that's why I am fee-only.

Deb Meyer (02:25.166)

It's about 2 % of the advisors nationwide in the US that are fee-only and we're all on NAPFA, N -A -P -F -A, if you're interested in seeking out a fee-only advisor. But for all of us, there's a tendency to want to do what's in our client's best interest. It's just the avenue under which we can do that and the limitations that apply.

That's where the fee-only and fee-based distinction comes from. Any education I'm offering to you is out of that spirit that I'm not an insurance agent, I'm not trying to sell an insurance policy, but just trying to help inform you on the types of insurance and kind of considerations as you're looking to purchase insurance …

What you should be thinking about from a life insurance perspective. All right, so let's get into the types of life insurance. First is the most common and its term life. So this is often equated to renting a home versus owning a home. In term insurance, you're paying a stated premium annually or whatever cadence you choose. It might be a monthly or quarterly payment to make it more affordable.

But you're paying that premium year in, year out, and as long as you're still living, you're going to keep paying that premium if you want that coverage. Whereas on a permanent policy, and we're going to get into two different types of permanent policies later, those are more like owning a home because you're paying in a premium, but you're also building up some equity within that policy. So if you later need to stop some of the premium payments or draw money out of the policy, you do have some asset there to collect upon.

All right, so for term life insurance, this is really ideal for a lot of younger, healthier parents who want a large potential death benefit. And the main reason you're seeking a policy like this out is because you want to protect your family. You want to give them some financial security if something did happen to you. So within term, you can have a premium that varies year by year.

Deb Meyer (04:50.414)

As you get older, the premium is going to go up. Or you could lock in a level term, which means you're paying the same exact premium year after year after year for whatever that specific term is. So let's just give an example and say you are in your late 30s and you want a 20-year level term policy. The 20 years is going to be the guaranteed premium amount.

If you lock in that policy for $1,000 a year, for the next 20 years, it's going to be $1 ,000 a year. If you don't lock in the level term, that $1,000 initially, well, it might be a little bit lower initially. So let's call it 800. It might be 800 for the first year and then jump up to 850 by year two, 900 by year three, you see my drift. So eventually it's going to surpass the $1,000 mark and it's going to go to... 1100, 1200, 1300, it could go very high by the time you're 20 years from the start of the policy.

In your 50s and 60s, if you're not locked into a fixed-level term, you really can have some substantial premiums on a term policy. So for most of my clients, when we're going through and selecting an insurance solution for them and we're going to an outside insurance broker,

We are looking at level-term policies to give some stability and security around what that premium is going to be for the fixed term. Now, when you think about term, it's going to be the most affordable of the life insurance solutions as long as you're young and healthy. With good underwriting, no major medical issues, you should be able to get a decent amount of death benefit for the premium that you're paying.

And for a lot of people, if you're in a traditional W-2 role, you might already have some employer-provided insurance, which is great. But if you ever left that employer, technically that benefit would lapse unless you pay extra to keep that plan going. So it doesn't easily just port over to a new role or position. And...

Deb Meyer (07:12.142)

You also don't know what the new employer potentially would offer in terms of death benefit. If you go work for a smaller company, a lot of small companies don't even have life insurance benefits. It's really at those larger companies that you find the life insurance benefits.

When you're thinking about how to structure it, again, just focus on the fact that you may have the employer-provided coverage already, and that can be helpful in some regards, but it's usually not the only piece I do for younger, healthier clients that want to have some protection for their family. Now, if you want to switch gears, we'll go to the second type, which is a permanent policy.

and it's called whole life. So like I said before, with the permanent, it's similar to buying a home. You're getting an asset, but it comes at a high cost. So just as an example, when I used to work at the multifamily office, I had a client who was a life insurance agent with Northwestern Mutual. And for him, a lot of his net worth was tied up in life insurance policies because he really liked it for...

tax efficiency and some of the borrowing capabilities, but that's what he did for a living. That's what he felt comfortable with. He also had some regular securities, mutual funds, exchange-traded funds, things like that, in retirement accounts or other brokerage accounts. But for the most part, a lot of his net worth was tied up in those life insurance policies.

I am not a huge fan of permanent insurance unless there's a very specific legacy goal around giving a dollar amount to surviving children or other family members. So for me, it's not something I'm super excited about, especially when you're talking about younger, healthier clients in their 30s and 40s, just because the premium can be so costly. And they really need those financial resources to continue to support their family and pay the current bills.

Deb Meyer (09:29.966)

So again, when you think about a permanent or whole life policy, I wouldn't consider it ideal for young parents early in their careers. I do see it more often with older or more wise parents that still have good health, but they're typically thinking about it from an estate planning perspective. For them, the next generation is going to get a bit of money income tax-free.

And then they might also use an irrevocable life insurance trust, also known as an ILIT, where the policy is essentially owned by that trust and the premiums are paid through annual gift tax exclusions and things like that. So again, that's a more advanced planning technique for a lot of families. And if you're listening to this podcast and are just trying to figure out a basic policy, I probably wouldn't suggest going and starting with whole life.

Now the other type of permanent policy I want to talk about would be universal life. That's also considered an asset because you have that kind of permanent component to it. But the beauty of universal life is there's some flexibility to pay the premiums in those good cash flow years. And then if you have more difficult years from a cash flow perspective,

You could potentially forego them and try to let the cash value that's already built up in the policy pay those premiums. You also have some flexibility on the death benefit as well. So let's say you start off with a million-dollar death benefit on a universal life policy, but after 15 years of making the payments, you're just in a situation where the payments are not affordable and you need out.

You could at that time take the policy paid up and just reduce the death benefit to whatever the current rate is based on those premium payments you've already made. Or you could kind of keep the policy, continue to have it open, and pay in premiums as the cash flow allows. So for a lot of people, if they're contemplating a business sale and they're getting a large amount of cash at one particular time in their life, they might want to get a universal life policy and just make one big lump sum payment and let that kind of drive the future value of the policy without having to commit to multiple years of ongoing payments. So it's a little bit different than whole life.

Whole life you have to make the stated premium payments year after year or you run into trouble. Whereas universal life, there's some more flexibility and there are different types of universal life policies.

Some that are more variable on the underlying investments where you can pick the the exact investments And maybe tailor them more growth-oriented. In either of these types of permanent policies, whether it's whole life or universal life The premiums are always going to be higher and you might also have some more hidden fees in terms of commissions or other items so

Again, from a cost standpoint, the term insurance is going to be the most cost-effective just in getting a higher death benefit.

All right, let's take a quick break. I do want to encourage you, if you're finding value in this episode or found value in some of the other episodes, please share this one with a friend. The podcast is relatively new. It started in November of 2023 and we always want new people to find out about it and learn from it. It really is a labor of love that I'm trying to make sure lots of people hear the good info and insights that I have to offer and my guests when we're doing guest interviews.

Please, I'd encourage you to share this episode with a friend or family member, and I thank you for listening. All right, let's talk about the amount of insurance for a minute. When we think about life insurance and how much, there are a lot of different factors, just like retirement, right? There's no magic number that is a one-size-fits-all all. So when I'm going through and advising a new client on the right amount of life insurance to pursue, first I'm thinking about their stage of life. Are they early or relatively late in their careers? I am also thinking about the number and ages of children, the current children.

When I'm working with a younger family that has multiple kids that are 10 years and younger, they're going to have a different timeline for the potential term life insurance policy in terms of the level of years, the period that we want, than someone who is later in their career and they're just trying to get a bridge for their two older children to get through high school and college, right?

So their term on a level term policy is going to be different depending upon what the ages of the current kids are and what the also ambitions are in terms of having additional children. So if you're open to having more children in the future, how many are you hoping to have? And that can really play a big impact in not only the term, but also the amount of life insurance coverage to pursue. So I know there are surprises sometimes when it comes to children, but for the most part, a lot of families know, hey, this is, we're open to this or we're trying to, you know, just be more mindful of the current kids we are blessed with.

Anyway, when it comes to selecting that type of policy, that's an important consideration. And it's something I always ask my younger clients who are in their childbearing years, hey, do you plan to have more children? And is there ever a timeline under which you think that door might be closing?

Deb Meyer (16:18.254)

All right, so the other thing to be thinking about is the level of earnings and how that coincides with the level of expenses that you currently have. So when we're thinking about the earnings, it's not just your earnings today. You also need to be reflecting upon, okay, are you happy and satisfied in your career today? Are there plans in the future to change careers or go from one income level that's much higher or lower than another income level in the future?

Really just thinking about not only the current earnings, but also the future potential earnings. And then also the expense side, really figuring out what some of those costs are gonna look like in the coming years. For a lot of my clients who are Catholic or Christian, they're sacrificing to send their kids to private school, for grade school and high school, and those bills can get very expensive.

For someone in that situation that does have private school tuition bills, they're going to want a higher level of life insurance than someone who plans to always use public schools K through 12. And then college funding is another consideration. If you have young kids now, but you're trying to pay for multiple children to attend four-year universities and want to pay at least half of the projected amount, those are going to be some very large numbers.

So again, if your goal isn't to pay for college or you don't think college is all that necessary, you're not going to need as much of a savings for your child or children. And you really can get by with a lower potential death benefit. I also like to have clients consider whether they're a single or dual-income household. And again, thinking about how that might change over the coming years.

Deb Meyer (18:19.534)

So if one spouse did pass away, could that other spouse's income support and cover the daily living expenses? I know in some families, you know, you have dual income earners and people are very aggressive on their savings. So they're able to live off of one spouse's salary already. So if the other spouse that's the lower earner were to pass away, technically the

the family could carry on just fine. But most of the time you're going to find that the household income is reliant on either one spouse because they're the sole breadwinner or two spouses in the sense that both of them need to be earning a certain level to pay the daily living expenses.

And then think about your mortgage as well. So most people have a mortgage that live in a home or that own a home. For a lot of people, the stress of having to come up with those monthly payments, if they were to lose their spouse, it really is a big financial hardship and something that it would be nice to be able to pay off rather quickly after they pass if it makes financial sense to pay it off.

So here are some of the pitfalls to avoid as you're thinking about insurance. The first one I'll start with is a personal example. This is before I went into financial advising. I was right out of college, started working at Deloitte Tax, and I bought a permanent policy, kind of a blended, I would say more similar to like a variable life policy.

It was like a $3 ,000 per year premium and a $500 ,000 death benefit, which as a young, healthy 22 -year -old woman, really was not a good use of my dollars because I was trying to meet other financial goals. And I really feel quite, I guess, stupid having made that decision early on.

Deb Meyer (20:39.982)

I thought I was doing something really cool and special, but I was unmarried, no kids, and I went ahead and bought this permanent policy. So what I later learned as I worked in the industry was that the premium upfront was heavily skewed towards the agent's commission. I also learned that the illustrations I saw when I was 22 and just starting my career full -time,

that the dividends in those policies, excuse me, the dividends have underlying interest rate assumptions in those policy illustrations. So if you're looking at something and you're already in a pretty high interest rate environment, the illustrations are going to show that that same high interest rate is going to continue for years on end. And that's simply not the case. So in my particular instance,

interest rates went down from what was originally projected. My policy didn't have much cash value. I realized this was a waste of money and I just said I wanted out. I had made several years of premium payments up until that point because I was in public accounting for a couple of years. So at that time, the $500,000 death benefit policy

If I wanted to take out what's called paid up and just reduce the death benefit, I could have $130,000 death benefit. But instead, I chose to remove that cash value. I didn't really have any tax consequence to it because I had already paid in more than what the policy was worth or it was a very small delta. And then took that money and paid off my car loan. And then I also bought a $1 million death benefit.

term policy for $450 of annual premium. So if you think about those numbers going from a $500,000 permanent death benefit policy to a $1 million term policy, I doubled the death benefit. And then my premium was only 15 % of the original $3,000 premium, the new premium on the term policy.

Deb Meyer (23:00.814)

Using this as an example of what not to do. And I hope it does encourage you as you think about policies for your family. The other pitfall to avoid is having zero insurance for a stay-at-home parent. And I say that because even though the stay-at-home parent is not earning an outside income or maybe they're just earning very limited income, they still have a lot of responsibilities in the house. So think about

childcare, laundry, grocery shopping, all of the different responsibilities a stay-at-home parent has, those cost money. And if you are in a financial position where if your spouse did pass away and you had enough salary to cover hiring that kind of stuff out, that's one consideration. But for a lot of families, it would be difficult for you to cover those additional expenses, especially if your kids are young and dependent upon childcare, camps, things like that.

Think about the surviving spouse and what capabilities you would have as a surviving spouse before you make a decision on whether or not the stay-at-home parent should have a policy. And really go through and tally all those services provided by the stay-at-home parent and then multiply by the number of years that the kids will require support. If you have young children, think multiple years of getting additional support and help. If your children are high school or above, it's probably not as big of a concern or consideration, and you don't intend to have future children. So that's one thing to be thinking about too on the stay-at-home parent. Now from a death benefit perspective, if you're getting a higher death benefit on the sole breadwinner, that makes sense, but...

I would still think about maybe like a $250,000 policy death benefit on a stay-at-home parent, even if their intention is to never return to the paid workforce. It's a nice thing to have in the event of an emergency. And then buying pure life insurance late in life is another pitfall to avoid unless you have a very specific legacy goal.

Deb Meyer (25:26.094)

As I said with the term policies, those premiums are going to go up astronomically as you get into your 50s and 60s. One of the things a lot of my clients will look into in those later years as they're getting closer to retirement is actually a hybrid long-term care and life policy. So for a lot of them, they want to be able to make a premium payment that if they use the benefits of the long-term care component, great.

Typically, most policies for long-term care are going to require that you have two activities of daily living impacted and can no longer function in those two manners. So, those long-term care policies could pay out for the long-term care benefit, but let's just say you come to the end of life and you didn't use all of the long-term care policy benefits available, then there will be a small death benefit when you do pass away that goes on to the surviving family members.

Again, it's not a perfect, you know, if you put in a premium of let's say $50,000, a lump sum, and the death benefit might only be $30,000 or something, that's still getting some of your cost back relative to what you invested. Whereas in a traditional long-term care policy, if you don't use the benefits, you essentially lose them. It's kind of like renting again, where you're just paying the premium and thinking, okay, I might need to use this in the future. And truth of the matter is on long-term care, there are a lot of convoluted things to think about and we'll probably do a whole other episode on it. But I do encourage you as you're kind of thinking about it from a stage of life standpoint if you are closer to retirement age or already retired, probably not worth it to be getting these traditional life insurance policies unless there's a very specific legacy goal that you want to pass on to the next generation.

And like I said before, with some of those permanent policies, being able to pass money down to heirs from an income tax perspective and a state planning perspective, it can be a good advanced planning technique.

Deb Meyer (27:51.086)

All right, so we talked about a lot of things. If you need to go back, listen to the three main types of insurance and then the considerations for how much life insurance. And of course, we wrapped up with some of the pitfalls to avoid when you are looking at a life insurance policy. If you want to work with an advisor and get a life insurance policy in place, I would encourage you to work with a fee-only advisor because they aren't really incentivized to recommend a more expensive, elaborate policy than you actually need unless it's in your best interest. And then if you want to go more DIY, there is a NerdWallet resource that I'm going to link to in the show notes that talks about some of the good life insurance companies from a term life insurance perspective. You could look at that article and then complete applications online, things like that, compare rates and so forth. Not every life insurance company is going to come back with the same suggested premiums. And some of it will depend on their underwriting and how good of a medical history you have. OK, I hope this was helpful for you.