Life insurance is a simple concept — you buy a policy that pays to your beneficiary or beneficiaries when you die — but the decisions of what kind life insurance to purchase, how much of a death benefit and how much you pay are extremely complex.
UNDERSTANDING THE NUANCES OF LIFE INSURANCE
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.
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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.
Cheri Martinen – We are here to help you with all of your insurance needs but today we are talking about life insurance. Last week we talked about term insurance, how much life insurance you might need, and then we talked about the bell curve of how much you need throughout your life.
Rex Lesueur – You need a lot more when you’re young and have lots of responsibilities and as you get old, you don’t need as much.
CM – And maybe when you’re older you’re looking for what we call ‘final expense,’ which is different from life insurance.
RL – Yes. Well, it’s still life insurance, it’s still a thing where people give you money after you pass away. But it’s for a different purpose. We had kind of gone over term insurance a little bit. I’m talking about a policy that is less expensive than the least expensive kind of insurance. And the reason it’s the least expensive is that the insurance companies know that only a percentage of the people that are going to buy this policy are going to die while it’s in force.
CM – And most of the time it’s for a chunk or period of time, which is like the term of the insurance.
RL – Yes. And most of these policies are written for people from their 20s through their 70s. You don’t get very many term insurance policies into the 80s.
CM – They know the likelihood of you turning in a claim go higher.
RL – Go a lot higher. Then there’s the part of the insurance world where we talk about planning for your ultimate demise. Really specifically wanting to have insurance available when you die for any number of reasons. The two most important reasons are final expense, take care of the funeral expense, any medical issues that need to be taken care of. Maybe by setting up a small nest egg for the family or what have you. But that’s the primary one for final expense.
Final Expense Insurance
The other one, and we’re not going to go into it real deep, I don’t even want to talk about it too much, is there are some very specific and very useful ways to use life insurance for estate planning. This typically only happens when someone has a lot of money. There’s something called ‘estate taxes’ out there. And right now I think the threshold is like $11 million for federal and I think it’s $3 million for state. So basically what that is, that’s a death tax. And we have death insurance, we have death taxes. So when you die, the state of Oregon or the federal government says, well, if you have this much money when you die, well because you died, we now want a certain percentage of that.
CM – And those funds are maybe transferring to another individual depending on how you planned your estate.
RL – Right. Well, but the thing is if you have this much money in this many assets, they’re going to say, you’re worth $20 million, we want $10 million of it. Okay. Now that’s a real problem for some people. It’s especially if that $20 million they might have is a farm or businesses or property and it’s not like they can liquidate that, the family can liquidate that money instantly at good terms in order to pay those taxes. And there are very, very positive uses of life insurance where people can buy life insurance for the purpose of paying those taxes, so that there’s cash available so that the family enterprise, the assets that have made this person successful and rich in their lives can continue on and be passed on to the next generation. So that’s one of the purposes of it.
Whole Life Insurance
There are two kinds, and we’re going to call these ‘permanent insurance.’ One is called ‘universal life’ and the other one’s called ‘whole life.’ Whole life is what they started selling 200 years ago, door-to-door back in the day. Literally there were companies like Prudential and Metropolitan Life actually made their bones in the world by having crews of people going around selling $500 policies, $1,000 policies for 50 cents a week. And they would actually have the guy come by and collect the money once a week. They were called ‘debit agents’ and that’s how the world got started.
These were straight life insurance policies. You paid on that policy until you died. And some of them had what they’d call a ‘savings factor’ to them where there was money that would save up. But most of these policies were so small, and they were dealing with, in a different era, when $1,000 was a lot of money to a lot of people. And the reason that debit agents would show up every month was so they could sell another policy. Another kind, another policy, all of this stuff that they would do and so on. So those policies are gone.
We still sell occasional whole life policies. They are very useful for straight up, if we’re looking at someone who’s already in their 70s, we will sometimes use that kind of policy. They’re more expensive, but they do have a savings factor to them, and that’s a useful policy.
Universal Life Insurance
The second kind is a universal life policy, which is a policy that definitely has a savings component to it. You put enough money into the policy so that it will continue on for as long as you live. Now this is all based on actuarial science and the cost of the insurance goes up in the plan every year. And so you have to have enough, you put enough money into the early part of the policy so that when we get to the end of the policy, when the insurance is really expensive, there’s enough money to pay the premium without you actually having to get into your pocket for it.
It’s kind of like a term policy that keeps going up every year, but in order to make sure that you can continue to pay for this term policy, because when you start getting out into your 80s and 90s, term insurance is really expensive. You have to put enough money into the policy in the beginning part of the term, beginning part of the year, or the years. And then that money accumulates and so on.
Now the money accumulates interest. You can also put it in the stock market. There are any number of different processes where you can invest your money so that that money can grow to make sure that the money is there for your life insurance when you ultimately pass away. This is a really complicated thing. I’m not going to try to get too deep into it. If you’re interested, give us a call and we can talk about how that would work.
One of the things I wanted to switch gears on here is talking about another kind of life insurance that a lot of people get surprised about. And if you have a post office box or you get mail, someone’s sending you probably once a week an offer to buy some insurance. It’s going to be through AAA or it’s going to be through someone else, and they’re all good products. I’m not picking on any of them. I shouldn’t name any names and I’m not going to. But there are some times people will sell these accident policies.
CM – And what’s the difference between an accident and a life insurance policy? RL – And like $2 a week, you know $1 million worth of accident insurance. Well, these are policies that only pay if you have an accident and 95% of the people pass away from biological reasons. Very few people have accidents and die, regardless of what you might think.
CM – Regardless of what the paper and the internet says. Most of us die in beds.
RL – Yes we do, from biological causes, so you need to be really careful about that. What you’re buying when you’re looking at these. If you have any questions, find a financial consultant or a life insurance person to give you some advice on it. Matter of fact, life insurance is too complicated to do at home. Find somebody to talk to and ask them and have them give you the skinny on all of it.
Additional Life Insurance Products
Another product that you see on TV a lot is the final expense ones that are specifically geared towards seniors. Those actually can be very useful. If you’re in a situation where someone is in their 70s or 80s and they’re maybe not in good health, most of the time those policies are still available. They say ‘no underwriting.” Underwriting is where the insurance company if you’re 30 and you want to buy $1 million worth of life insurance, the insurance company is going to come out to your house, they’re going to weigh you.
CM – And the idea behind this is that actuarial science again. So if you are very, very healthy, you pay less for that term or whole life insurance. Whereas if maybe if you have a chronic disease or something like that, they might say, you know, we aren’t interested in insuring you or we’re going to insure you at a higher rate because our actuarial science says that you have a higher likelihood or a lesser likelihood to file a claim on this and the only claim that you’re going to file is if you’ve passed away.
RL – Right. So they’re going to check and make sure you’re healthy before this.
CM – Sometimes you don’t need to. There are certain plans, especially through work. A lot of times I know they offer where you don’t have to do any underwriting and that’s okay. So you just have to make sure you know which one you’re looking at. And then maybe the cheaper one does have the underwriting and the more expensive one doesn’t. And you have to decide is it worth it?
RL – One of the things that these senior policies do is they usually have two tiers. They usually have the one where they have a limited underwriting one where they ask maybe twenty questions, do you have diabetes? Do you have high blood pressure? Have you had cancer? These kinds of questions. And then they have the ones that there are no underwriting questions at all. Typically those policies, there’s a caveat, and it says that if you die in the first five years, we’re not going to give you the full face value.
We’re going to give you a percentage of what you’ve paid. So they might give you all of the money back that you paid. So if your premium is $200 a month or something like that with that and you live three years, well you might get 80% or 90% of that money back as a benefit. Whereas if you were to live the full five years, you would get the total benefit. So that’s one of the caveats that goes along with those policies and they can be very useful. For the right person in the right case, there’s nothing wrong with a senior life policy. Now just because there are so many different kinds of life insurance, there’s going to be any number of different costs.
CM – We kind of talked about how you get different prices based on your health sometimes depending on underwriting, but it doesn’t have to be expensive. It can be as low as $20 a month or $25 a month all the way up.
RL – Whatever you need. There are life insurance policies for people who, like when we talked about estate planning, they’re buying multiple million dollar policies. And this is the expensive kind of insurance, the universal life policies or the whole life policies because that money needs to be there at the death. So don’t be afraid. Call up, find out, and getting some is better than none. Sometimes, if we’re planning for a final event 25 years before it looks, you think, well you know $25,000 might be enough. And you know what? Anytime someone does pass away.
CM – Leaving anything is a gift to the people that are left behind.
RL – It is a gift. So do some research, pick up the phone, call an insurance professional, call us.
CM – 1-800-452-6826.
RL – We’re going to talk about two things that are in the genre of life insurance. The first one is long-term care. So what is long-term care? That is the kind of policy that you purchase so that if you end up in a nursing home, your family does not have to dig into their pockets and/or into your pockets to eliminate any assets you might have to take care of you.
CM – The thing I think that’s classically thought of for this is Alzheimer’s. Your physical appearance isn’t that you can’t walk or can’t do dishes or maybe even you’re very good at still playing the piano or doing crafts. But you still need care every day. It might just be for cooking and cleaning, or it might be for a much more, depending on the progression. And it could be not just for one year. You can live with this disease for years and years and years.
RL – There is a kind of insurance that is called long-term care and it is a very specialized kind of insurance. Some people buy it. There’s three categories of people that look, when I look at someone who’s going to want long-term care insurance. If you don’t have any assets, there are three different kinds. So you have people with no assets. They’ve lived their life, they don’t have a lot of money or they already spent them on their care. If they need to go to a nursing home, they’ve got no money, the state of Oregon is going to put you on Medicaid and going to pay for that, so you don’t need to have long term care for that person. The state is going to take care of it.
Then there’s the people who have plenty of money and there are a lot of people in their 70s and 80s, 90s, who have assets and thousands or millions of dollars in the bank. Well, they don’t need it because they can pay for their own care. It’s the people in the middle who have worked hard. They’ve got some assets. They want to protect them. If one spouse goes into a nursing home, it could be financially devastating to the others, to the other spouse.
CM – I mean, it could be their entire social security check or more.
RL – And that’s exactly how Medicaid would take if you were to the point where you’re with Medicaid. In order to get Medicaid, you can’t have any assets. Literally you can’t own a home. You can’t own a car. You basically have had to liquidate everything you have in order to take care of yourself in order to pay for it. So that’s how you get the Medicaid.
Now, the people in the middle who have worked hard to build some assets don’t necessarily want to go to that point so that they can afford to take care of the spouse or themselves in a nursing home. So those are the people who need it. We’re going to flip real quickly over to disability income. Disability income is a product that if you are hurt at work then the insurance company provides coverage, provides income to keep your household going. This is also very technical.
CM – And it’s normally a portion of your income. So it’s kind of more they take what you were making and then they say based on the policy you purchased, and it depends on the policy you purchased, we’re going to pay you maybe 60% of your income while you are disabled and that’s going to be that disability. They do have some deductibles, and the deductibles tend to be time deductibles instead of money deductibles. So if you’re disabled for let’s say four months and then after four months then you start receiving that payment to make sure that your family can continue on even with a portion of your income even though it’s not the full amount.
RL – This is a product that doesn’t get sold a lot because the insurance companies typically don’t want to insure anybody that uses their body in their jobs. Meaning that if you’re a contractor and you pick up a shovel occasionally, you’re not going to be able to buy it. They don’t even like to insure insurance agents because, I don’t know why.
CM – Carpal tunnel? RL – I don’t know, but it’s also not cheap. And so mostly medical professionals and lawyers and people who have high incomes purchase this kind of insurance.
CM – It is interesting to look at though, and if you do have it through work, I know some people can buy this type of coverage at their workplace. It’s not a bad idea to look at, especially if you have maybe a lower life insurance policy and then you can supplement it with this disability one. If you’re worried more about disability instead of death because it’s a higher possibility, I think actuarially.
RL – That you will be disabled then it is that you will die. And if you’ve got a single income household, it’s all dependent on one person. If that person has a nice high income and they get injured or hurt and they can’t go back to work, it’s just as devastating, maybe even worse than if they’re passed away because you have the ongoing medical bills and the cost of care for that person.
CM – So this is complicated. Don’t do it yourself.
RL – Those are two products that I suggest you don’t do it yourself. We don’t sell long-term care. I’ve put that off to someone else every single time because it is so complicated and there are so many different nuances to it that we’ve made a decision we will recommend a professional that does that.
CM – If you have any questions about life insurance or any of the products we talked about today, you can give us a call at Bancorp Insurance at 1-800-452-6826. You can also find us online at www.bancorpinsurance.com. You can listen to this show or all of the shows that we’ve done, and we did two on life insurance, so it’s a two-parter. Or you can listen to all of the other fun stuff we do. Again, give us a call if you have questions, 1-800-452-6826.