02 Apr Insurance Talk — Understanding The Nuances of Life Insurance Part 1
Rex and Cheri have the answers. Listen here.
Insurance Talk — Understanding The Nuances of Life Insurance Part 1
Cheri Martinen – You are listening to Insurance Talk with Cheri Martinen and Rex Lesueur from beautiful Central Oregon. We are from Bancorp Insurance. We’re the father-daughter team who sells insurance to all of Central Oregon and fourteen other states if you can believe it or not, but today we are here to talk about life insurance.
Rex Lesueur – Life insurance is a rather big subject. There’s a lot to say.
CM – Well, and you think about it, you’re like, yeah, okay. I just go buy some, easy peasy. It’s a little bit more complicated than that. Sometimes you can get it really easy maybe through an employer or maybe a smaller amount and it’s easy to purchase, but there’s more to it when you start thinking about it, right?
RL – Well, when you start thinking about it, it’s huge. There are people who, that’s all they do, their whole career. They don’t sell auto insurance, they don’t sell commercial insurance, they don’t sell health insurance. All they sell for forty years of their life is life insurance. And they get very good at it. And there’s a lot of nuances to this product. It’s deep, it really is. That’s why we sell life insurance. We don’t sell a lot of it because oftentimes if someone has a particularly difficult case, I’ll refer them to somebody else. So there’s enough to it that if you’ve got a difficult situation, you’re going to want to get some real expertise. But let’s talk about this. Why life insurance? Why would anybody want to have life insurance? What’s the point? Well, life insurance is really a misnomer. It really probably should be called death insurance.
CM – As soon as you start talking about life insurance, you’re actually talking about when you die.
The Life Insurance Bell Curve
RL – When you die, or actually not so much when you die. Well, it’s actually when you die. But what happens to the people that you love, and you’re responsible for when you die. Because you’re dead, and regardless of what anybody says, your part of this equation is over. Basically, it’s time to let the other people have to deal with it. So pre-planning, we all know this is something that’s going to happen so people can plan about if and when someone’s going to die and what is going to be the financial consequences of it. Now people die, we miss them, we love them, blah, blah, blah. That’s the emotional consequences. And that happens with almost anybody dying. But not everybody has issues when it comes to financial issues when somebody dies.
Let’s take the example of an elderly person who has saved well and has assets when they pass away. If they don’t have any debts and all their medical bills are paid for by Medicare, they have very little final expenses and nobody, or likely nobody is depending on their income for their livelihood. So if you’ve got an older person with assets, they pass away, the family uses the assets to pay the final expenses, the funeral costs, and then they divide up whatever’s left after that. That person really doesn’t have a need for life insurance. So let’s talk about where and what we think about when it comes to life insurance and how much we need. And one of the things I like to talk about is the life cycle of life insurance. And how that works is if you could, okay, I can’t do this on the radio.
What I want you to do is I want you to draw a bell curve. Imagine this bell curve and we’re going to start off on the left-hand side and we’re going to start off and we’re going to talk about, and this is for most people and this doesn’t mean everybody. Most people start off their lives, their parents are responsible for them. If they were to meet an early demise, their parents are responsible for their final expenses. Now, parents may or may not want to insure that risk. They may not. Because remember what life insurance is doing is we’re just transferring the risk, the financial risk, of your premature death from you to somebody else. And that’s to an insurance company. So you’re giving that risk to an insurance company so that if you die, there’s money that’s available to pay for the financial hardship that is going to be given to the people who are left. And this financial hardship thing changes throughout our life.
When I talk about the life cycle of life insurance, we’re going to start off at the beginning on the left-hand side of this bell curve. We’re going to start off with, okay, well let’s get you out of high school or just out of college or you’re starting your life as an independent human being, separate from your family. Well, what would happen in the event that you met a surprising, premature death? Well, at first, not a lot. What do you have? You owe some money on your car. It’s probably destroyed in the accident.
CM – You’re probably still renting.
RL – You don’t have a lot of things and nobody’s looking to your paycheck and to your ability to earn money to support them and provide for them. You have not accumulated those kinds of situations yet. So what we have to look at is, but then we start looking at, you’re going forward in your life and all of a sudden, and things happen in this order. Sometimes they don’t. We’re going to use this order.
Transferring the Risk
RL – Life insurance is transferring the risk of financial loss due to your premature death to somebody else. So that your family and the people you love can have enough money to transition into a life without you. And it’s a very useful tool and we recommend it to a lot of people. Now, where we ended up is we were talking about a bell curve. So we start off, we don’t have any assets. We don’t have any liabilities. Something happens to us, somebody somehow will take care of it. And so there’s no life insurance really needed. Maybe you have a small policy from your work or something like that, that’ll take care of any financial obligations you have at the end of your life.
CM – Maybe a credit card bill or something.
RL – But then you start getting assets and these assets, I like to call them wives and children, homes and cars and maybe a business, throw in a boat, and you’ve got all of these things that are dependent. These people are dependent upon your income and the more of them you have, the more they’re dependent on your income.
CM – I always think about it this way. If my spouse had met his final demise tomorrow, where would my financials be? What would happen? ‘Cause his income would go, and so I would be responsible for a lot more with just one income, making it much harder.
RL – Making it twice as hard. So this escalates up the left-hand side of the bell curve ‘til you get to the top. Now everybody’s top is different. Not everybody has children. Not everybody buys homes.
CM – You might be responsible for an elderly parent.
RL – Any of these things. So these are all assets that you have and the liability side is the fact that they’re all dependent on you for your financial income in order to continue on with their lives as they are.
CM – Buying groceries.
RL – That means most people have a large need for life insurance when they’re young, typically from their mid-twenties through their mid-forties. There’s a big need to take care of the responsibilities you have when you’re in this part of your life. Then what happens when you go down the next side is, okay, then the kids move out of the house.
CM – So you’re cresting the curve.
RL – You’re coming down the other side of the curve and the kids move out of the house, at least you hope, the house gets paid for, you and your wife hopefully are financially conservative and you have some money in the bank, and you get down here to where you’re 65 or where you’re getting ready to retire. And all of a sudden, if something happens to you, first of all, then when you retire, your income goes down and hopefully social security, which would be the only thing you might lose, or your pension might go away. So there’s some of that. But you get down to the point where you have a very little bit of risk of financial loss when you get down into your 70s and 80s. So the curve goes up where you need a lot of insurance and the curve goes down where you need less insurance. And the kind of insurance you need at these points in time are different. There are three different kinds of major kinds of life insurance. There are all kinds of different products out there.
CM – There’s a lot of variation on the three main themes.
Types of Life Insurance
Term Life Insurance
RL – The first and most popular kind is something called ‘term insurance.’ And that’s the kind of insurance that you get when you’re at the beginning of your financial life and you have lots of assets and lots of liabilities. This is the kind of insurance that pays in the event that you die prematurely, but it doesn’t continue on forever. When we say ‘term,’ it lasts for a specific number of years, ten years, twenty years, thirty years. And it’s a lot cheaper than other kinds of insurance because the company, in this case, is betting that, well, they know that only a certain percentage of people are going to die prematurely.
CM – Prematurely within your age and health group.
RL – And they have all these people, they call them ‘actuaries,’ who sit around and read, take all of the information from the tables and so on from the government and everybody else who keeps track of that. And they determine what it costs and how many people are going to die based on various factors. And so they build that into the price, and the price is a whole lot less when you’re looking at a group of people and saying, ‘well, how many are going to die in the next thirty years,’ than if you look at a group of people and say, ‘hmm, they’re all going to die sometime.’ If you’re calculating how much money you need as an insurance company in the bank in order to pay the claims, it’s a whole lot different when we’re looking at term insurance because they know that a big percentage of those policies they sell, they will never have a claim on. And so that’s why term insurance is cheap and it’s a great tool for young people and people early in their financial lives to purchase a lot of insurance cheaply.
CM – And it’s the type of thing where, if there was an accident, would you have enough money to maybe pay your mortgage to make sure that you could live off of one income? RL – Then of course, how much do you need of this kind of insurance?
RL – So the real question is, you need to sit down with the people that are, well, you have to have them involved, but you have to think about how much money is going to be needed in order to transition from, if it’s a one-income household, it’s one issue. If it’s a two-income household, it’s a second issue. So if you’re a one-income household and you’re the sole breadwinner, you have to look out and say, I need to be able to provide enough money, in the most ideal terms, to provide enough money so that my spouse can continue to have his or her current lifestyle so that they can continue the part of your life where one spouse was staying home to raise the kids. Or even if there weren’t any kids, can transition into a situation where maybe they can then go get a job and how long that will take and if they need education and so on and so forth.
So if you’re 50, well that’s a different calculation than it is if you’re 30. And if you have two kids, that’s one thing. And your income is going to be responsible for sending, in theory, two kids to college. Well, that’s going to be a whole different equation than if you have four kids and you want to send four kids to college. So you have to sit down and kind of strategize as to how much you are going to need. Do we pay off the mortgage? Is that something that we want to do? Do we want to pay off the mortgage and put enough money aside for the kids to at least maybe have a state school education.
CM – Not go to Yale, but that’s okay.
RL – Yeah, not go to a private school. We’ve got to also recognize that when someone loses a spouse, the other spouse is still alive and they still can bring in income. If it is a one-income household, that’s one issue. If it’s a two-income household, you have to kind of have a conversation about how much are you going to miss them. CM – Yeah, how much would each spouse, because then you’re talking about not just yourself, maybe your demise, but maybe a spouse’s demise as well.
RL – If there are two people working in tandem to raise a family and create a household, well if they’re both working and one spouse has to go on a business trip once a month and the other spouse has to go on a business trip once a quarter, then obviously there’s coordination and so on. Now all of a sudden one isn’t there. The other spouse still is going to have to work. They can’t change their job, well they can, but they don’t necessarily want to have to change their job. There’s going to need to be money for childcare. There’s going to need to be money for all of the things that support the individual that’s not there and so on.
Literally with every single life insurance company and almost most agents will be able to sit down with you, and they’ve got these cute computer programs where you put in, okay, 20 years, we’re going to support the stay-at-home mom and what is it going to take? And you put in the money and you put in what she’s going to get from social security because there is social security you get when a breadwinner leaves and a parent leaves. You put in all these calculations and so on and you come up with a number and it’s always huge.
CM – It’s bigger than what you think, I think is the takeaway, right? You might be like, oh well I only need like $100,000 of life insurance. That’ll be fine. But when you start adding up all of what your income is for maybe a year, and then how that would extend for, like you said, your kids for even college, depending on their ages or for childcare for multiple years, it adds up very, very quickly.
RL – It does, and you need to sit down and be really conscientious about how much you need and then you have to back it into what you can afford. And then, of course, some people are more resourceful. You get what you can. I mean, if someone says, ‘Well you need $1,000,000 worth of life insurance,’ don’t look at them and say, ‘I can’t afford that.’ If you can afford $500,000, well buy $500,000, because that $500,000 will make an incredible amount of difference because people tend to survive. This is just going to make it easier for them. So having that kind of money, pay off the house, you don’t have to worry about the mortgage, put some money away for the kids. If there’s a business involved, shutting down the business, taking money to maybe sell it, all of the things that go along with the transition of going on in life without you, and that can get kind of expensive.
My recommendation is that you sit down and you talk to a counselor about it, that you talk to a live person about it, and that you make a decision to at least have some if nothing at all. One of the jokes that I always tell to break the ice, and I do this with a lot of couples, I’ll say, ‘Well, you know, we’re going to get enough insurance so that your spouse can marry for love the next time rather than money.” Not implying that necessarily they didn’t marry for love the first time, but you don’t want to put them in a situation where they have to marry for money the second time.
CM – Yeah, oh geez.
RL – Bad joke. Excuse me. Probably politically incorrect.
CM – Oh dad jokes. Alright. You’re listening to Insurance Talk with Cheri Martinen and Rex Lesueur, we’re from Bancorp Insurance. If you have questions about life insurance, please give us a call at 1-800-452-6826.